SMOKING GUN

By John Greenwald

Smoking Is Addictive--Warning to be placed on the Liggett Group's cigarette packs.

Of all the targets of government wrath in American industry, none have been scorched more severely or more often than U.S. tobacco companies. But despite being hit with everything from health-warning labels to smoking bans in buildings to Vice President Al Gore's tale last year of his sister's fatal lung cancer, cigarette makers have survived and prospered. The industry's profits have been healthy for a decade, and in spite of countless lawsuits, no tobacco company has ever paid out a single penny to compensate anyone for damaged health.

That is precisely why jubilant anti-smoking forces applauded a remarkable string of confessions by the Liggett Group last week as the straw that could finally break Joe Camel's back. The admissions, made to end Liggett's role as a defendant in 22 state lawsuits against the five largest U.S. tobacco companies, offered an unprecedented peek at some dirty little secrets inside Liggett and, by implication, the rest of the $45 billion tobacco industry.

Liggett, a company with a negative net worth and shrinking business, is the door prosecutors hope to walk through to get at the likes of Philip Morris, the maker of Marlboro, which controls half the tobacco market as the center of a diversified empire. Last year Philip Morris made $6.3 billion worldwide on revenues of $69.2 billion. What excited prosecutors most was the prospect of getting their hands on mountains of documents that Liggett agreed to surrender and that they believe could incriminate all the other cigarette makers. They have already seen a slew of Liggett files, the product of other lawsuits. But hundreds of thousands more, particularly those pertaining to the group of industry lawyers that met to discuss litigation strategy, may be protected by client-attorney privilege and remain under seal in a state court in Winston-Salem, North Carolina. A judge is expected to hear arguments next week from Philip Morris and other companies that want to keep the papers boxed up.

The attorneys general of the states that won the settlement could hardly contain themselves. "This is the beginning of the end for this conspiracy of lies and deceptions that have been perpetuated on the American public by the tobacco companies," said Arizona's Grant Woods, who brought one of the first state suits that aim to recoup billions of dollars in Medicaid money spent on illnesses related to smoking. Attorney general Hubert ("Skip") Humphrey III of Minnesota emphasized the battles ahead: "This is like busting a street drug dealer to get the Colombia cartel. We are very serious about going ahead and making sure the entire industry is transformed."

Not at all ready to cave in, the tobacco giants call the agreement a lot of huffing and puffing and a desperate ploy by Liggett boss Bennett LeBow to cut his losses and possibly force another cigarette maker to buy him out. Liggett's deal is transferable to any acquiring tobacco company except Philip Morris. "The only ones who potentially benefit from LeBow's latest shenanigans are plaintiffs' lawyers," said a joint statement from the four major cigarette makers (Philip Morris, R.J. Reynolds, Brown & Williamson Tobacco and Lorillard), who account for 98% of U.S. tobacco sales. Through the first nine months of 1996, Liggett had a net loss of $9.7 million.

No wonder LeBow gleefully handed out smoking guns as if they were product samples. The smallest U.S. cigarette maker, whose brands include Chesterfield, L&M and Eve, admitted what just about everyone outside the industry long held as fact: that cigarette smoking causes lung cancer, heart disease and emphysema. In another affirmation of the obvious, Liggett acknowledged that nicotine is an addictive substance. That refuted the sworn denials that seven industry leaders, including a Liggett representative, made before Congress in 1994. Says LeBow of the thinking behind last week's confessions: "It was a business, a moral and a personal decision."

In perhaps the most revealing statement, Liggett confessed that cigarette companies like itself have long aimed their pitches directly at teenagers--something the rest of the industry denies. Declared Matthew Myers, a lawyer for the National Center for Tobacco-Free Kids: "For 30 years the tobacco industry has said to anyone who will listen, 'We don't market our products to children,' despite the fact that virtually all new smokers start as children and are addicted before they are old enough to purchase the product legally. Today that claim is dead."

The settlement struck a resonant note at the Clinton White House, which has been seeking to ban the promoting and selling of cigarettes to children. For example, the Administration strongly backs new Food and Drug Administration rules that require smokers up to the age of 27 to show photo ID cards when buying cigarettes. (The regulations bar tobacco sales to anyone under the age of 18.) Said Vice President Gore, who greeted the Liggett deal as a breath of fresh air in a smoke-filled room: "It's about time the tobacco companies told the American people the truth."

As a warning to smokers of all ages, Liggett will state on cigarette packs and in ads that smoking is an addictive habit. Liggett will also cooperate in suits against other tobacco companies and will allow its own employees to testify. Moreover, Liggett agreed to pay a quarter of its pretax profits to the states every year for the next 25 years, a promise not as impressive as it sounded. "Twenty-five percent of nothing is nothing," quipped one analyst.

But with or without any money, the sweeping settlement is a crucial moment in three decades of public and private efforts in court to combat tobacco use. Critics first relied on research and education to counter smoking--a tactic that produced plenty of posters but not much change in consumers' habits. Legal attacks proved more successful. "We were always outgunned at first," says John Banzhaf, a law professor at George Washington University and founder of Action on Smoking & Health, an antitobacco group. But that nose-to-nose approach led to victories ranging from bans on smoking in public places to Liggett's surrender last week. Says David Logan, a law professor at Wake Forest University in Winston-Salem: "The longest and most successful joint defense agreement in American industry has started to crumble."

The Liggett settlement could not have been a complete surprise to its tobacco rivals--after all, the company had an earlier deal with five states--and they seem fully prepared to continue the case-by-case fights over liability. Indeed, the next big state suit, in Mississippi, is scheduled to go to trial in June.

No sooner did advance word of the settlement make the rounds last week than the rest of the tobacco industry raced into the North Carolina court to keep Liggett's papers under wraps. The cigarette makers claim that the documents are protected by the industry's joint defense privilege on attorney-client communications because they bear on Liggett's dealings with the other companies. However, a few files have already been distributed, and other documents are likely to leak out. "It's very hard to say 'attorney-client privilege' when half the world will be seeing them," says Henry Miller, a past president of the New York Bar Association. "You are not playing around with some little plaintiff's lawyer who has a three-person practice but with the attorneys general of states."

Even as some Wall Street analysts downplayed the impact of the settlement last week, the stock of several tobacco companies took a drubbing. Among them was Philip Morris, which plunged $17.50 a share to finish trading for the week at $111.50--a drop of 13.6% or $14 billion in market value. Also punished was stock of RJR Nabisco, parent company of R.J. Reynolds (Winston, Camel), which closed at $31 a share on Friday for a five-day drop of $2.875, or 8.5%.

The heat on tobacco shows no sign of lessening. With 22 states in the fray so far, others are certain to join in. And companies face more than a dozen private class-action suits and hundreds of individual lawsuits. At the same time, cigarette makers--minus Liggett--will soon troop to court in Greensboro, North Carolina, to hear a judge's decision on whether to allow new fda rules that say tobacco billboards must be at least 1,000 ft. from schools and that require young smokers to show photo IDs.

Will smokers take Liggett's mea culpas to heart and light up less often? After declining for years, smoking has leveled off, and teens seem to be increasing their intake. Older smokers may pay more heed than younger ones to warnings about addiction on Liggett cigarette labels. That's because the young are more apt to look upon smoking as cool and the consequences a distant threat. And they may cling to that view even when a major manufacturer admits that with regard to the truth about cigarettes and health, it has been blowing smoke for years.

--Reported by Aixa M. Pascual and Jane Van Tassel/New York and Bruce van Voorst/Washington

With reporting by AIXA M. PASCUAL AND JANE VAN TASSEL/NEW YORK AND BRUCE VAN VOORST/WASHINGTON