Bad news continues as BAT tries to reassure investors

DAVID USBORNE

New York

TOM STEVENSON

London

A flood of bad news from around the world continued to dog BAT yesterday even as a hastily convened analysts and investors meeting in London was being reassured about the impact of a landmark legal settlement by US tobacco rival Liggett last week.

It emerged yesterday that Brown and Williamson, BAT's US-based subsidiary, is under investigation by a federal grand jury over claims that it knew about an operation to smuggle its cigarettes into Canada to avoid Canadian taxes.

In a separate development in India, BAT was also hit yesterday by an unexpectedly harsh court order forcing its 32 per cent Indian subsidiary ITC to deposit 3.5bn rupees ($101m) pending an appeal against an 8bn rupee fine for tax evasion.

As this bad news flowed in, industry watchers in London were told by a BAT lawyer that Liggett's settlement of a US class action, which alleged that tobacco companies deliberately manipulated nicotine levels in cigarettes to encourage addiction, would not change the state of its own litigation.

The Liggett settlement had sent tobacco company share prices plunging last week as investors feared that the industry's long-maintained united front against legal attacks had started to crumble. BAT fell further yesterday, closing down 12p at 488p.

The lawyer restated BAT's view that the Liggett settlement was simply a sideshow in an attempt by Liggett's controlling shareholder, Bennett LeBow, to gain control of the second largest American cigarette maker RJR Nabisco.

The latest US probe, which could result in the filing of criminal charges against Brown and Williamson executives, is one of five grand jury investigations into the tobacco industry currently being pursued under the auspices of the US Justice Department, the New York Times said yesterday.

The newspaper reported that the five investigations could lead to jail terms for some of the industry's most senior executives and that several of them had already taken steps to hire high-priced criminal defence lawyers.

The sense of siege among the cigarette manufacturers was also compounded by a separate report in the Wall Street Journal that a former scientist at Philip Morris, the US's largest cigarette maker, had testified that the company knew about the addictive qualities of nicotine and manipulated nicotine levels. Philip Morris, which saw its share price plummet by $5 in early trading yesterday, has consistently denied such claims.

In an affidavit delivered to the Food and Drug Administration this month, the scientist, Ian Uydess, who left Philip Morris in 1989, reportedly said that the company "routinely targeted and adjusted" nicotine levels in cigarettes to match the "optimum range" preferred by smokers.

Of the five grand jury investigations, it is thought that the probe into Brown and Williamson is likely to conclude first. The jury is studying claims that the company was aware of the alleged smuggling operation into Canada, where cigarette duties are much heavier than in the United States. Early last year, the headquarters of Brown and Williamson, in Louisville, Kentucky, were searched by federal agents. Executives have denied the company had any knowledge of smuggling, however.

Any criminal convictions involving tobacco industry executives of any of the main companies would embolden the US government in its efforts to label cigarettes as drug products and regulate their sale.