Bennett LeBow is the CEO of the Brooke Group which owns Liggett Tobacco, the smallest of the six major tobacco companies. Considered a relative newcomer to the industry and a Wall Street operator, LeBow stunned his counterparts at Philip Morris, Brown & Williamson, RJR Nabisco, Loews and Lorillard when he broke ranks and announced he would settle the Medicaid suits brought by forty state attorneys general. In this February 1998 FRONTLINE interview, LeBow also revealed that he was cooperating with the Justice Department in its criminal investigation of the tobacco industry.
Q: What was the tobacco industry’s legal strategy in essence?
Lebow: Then it was fight every lawsuit. Wear them down. Spend all the money in the world because the cigarette companies had all the money in the world to spend. Just wear the other side down, and they’ll go away. And they were going away. The strategy seemed to have been working.
Q: When did you begin to question that strategy?
LeBow: Well, honestly, for about eight, nine years, I just followed the strategy. We had a group of lawyers, about six or seven outside attorneys that just did, year after year, this tobacco litigation. Then the major companies led the way, so to speak. And back in 1995, about three years ago, a couple of strange things happened. This group of outside attorneys that we had were doing most of the tobacco litigation for Liggett and their law firm was dissolving for other reasons. And they came to me, and they said we want to go to another major law firm in New York. I said, your law firm is dissolving, I know this other smaller law firm that specializes in product liability…they’re experts in it, why don’t you go to that law firm. I’ll put you there, and we’ll use them because they’re experts in this. And I don’t know this other law firm.
They called me up the next day. They said, “Mr. LeBow, you let us go to this big law firm, Philip Morris will pay all of your legal fees.” I said, “What? They want to pay my legal fees. My competitor wants to pay my legal fees.” I know we’re in the joint defense thing, but it didn’t sound right. So I started to smell something wrong there. This is now, I think we’re talking about September of ’95. I said, “Go ahead and go there, because I’m busy with some other things. Go there. They want to pay my legal fees. I won’t right now look a gift horse in the mouth. We’ll take the money.” But I really started to smell something.
Q: In effect these were bargain attorneys?
Lebow: Yeah, well, free.
Q: Free lawyers. Free. . .?
Lebow: Free lawyers. I mean, you know, how can I turn it down. It really got my. . . the bells going off.
Q: What kind of money are we talking about in terms of your legal fees?
Lebow: It was running about eight million dollars a year at the time.
Q: So, Philip Morris is willing to give you a legal defense fund at eight million dollars a year, no questions asked.
Lebow: Right. Providing my lawyers go to one of the firms they like, not my firm.
Q: And so then, you get into the attempt to leverage.
Lebow: And so then, I get involved with some other share holders and am attempting to. . . recommending to RJR that they spin off Nabisco. They take their three businesses and separate it from the tobacco business.
Q: You own Liggett, your holding group and you then want to try and take over a larger company, RJR, which also obviously has a big tobacco component.
Lebow: And make money in stock that we’ve bought in RJR. And the obvious way was to separate the two businesses, the tobacco business and the food business. The food business in this case being Nabisco. So, myself and other shareholders, we started an action doing that, and we won. All the shareholders voted for this to be done.
Q: Now, why did you want to split them up?
Lebow: So, the share values would go up.
Q: And what was your sense of the Medicaid suits?
Lebow: Well, let me finish. They came out and said, “Mr. LeBow, we can’t split these two companies up because there is too much litigation.” I said, “What litigation?” I’ve been told for eight, nine years that there’s no litigation. There’s a couple lawsuits, you know, Medicaid and a few other individuals. There was some class actions then, which everyone has said, “No problem. We win everything. There’s no issue.” Now, I’ve got two things happening. I have Philip Morris paying my legal fees. I’ve got RJR saying they can’t do this spin off or split up because of all the litigation possibility. I really got suspicious. So, then I authorized the new law firm. We’re now talking three months after Philip Morris’ overtures to the other side. I really want to find out what’s going on now.
Q: Talk to the other side in what?
Lebow: Meaning the plaintiffs, meaning the Attorneys Generals, meaning the Castano case class action lawyer.
Q: So, both the class action lawyers and the Attorney Generals like Mike Moore. You authorized the new lawyers, not part of this big firm.
Lebow: Not part of those guys. In secret.
Q: In secret, to talk to the plaintiffs. Unheard of before.
Lebow: Never been done before. No tobacco attorney ever talked to any of these other attorneys in thirty years. So, the first time in secret talking to them in late December, ’95, they had some secret meetings to explore what’s going on. Because I want to find out what’s going on. And the easy way to find out is to talk to the other side. Instead of trying to read papers, let’s hear the other guy’s view point. The lawsuit, which I didn’t quite understand at the time. There are these class action lawsuits, and the big issue is nicotine. Nicotine, never disclosed by the tobacco companies that they really believed that nicotine’s addictive. And also in the back of my mind, remembered everybody getting up in Congress and swearing, “No, nicotine is not addictive. We don’t believe it is. Etcetera, etcetera.”
Q: Tell me about when you first talked to the other side.
LeBow: But then in ’95 when all these other things are happening, I’m starting to think something’s wrong here. See after meeting with these AG’s, we had to have two months of secret meetings not telling any of the attorneys, not telling anyone. The only person I told was the new president of Liggett at the time, and myself, and the new attorneys. We then negotiated…the settlement in the March of ’96.
Q: This is called Liggett One?.
Lebow: Liggett One, with five Attorneys General and the Costano class action suit attorney.
Q: Did you notify the people who were paying your legal fees or any of their friends, or RJR that you’re about to do this?
Q: You didn’t tell them that after thirty or forty years of a united front, that you were about to defect?
Lebow: Absolutely not. They all read about it in The Wall Street Journal. I didn’t tell anyone because I honestly, you know, I can’t tell my attorneys, they’re being paid by the other tobacco companies. So, I can’t. . . I don’t say, I don’t trust them, but it wasn’t right. The only attorneys who knew worked with a new law firm.
Q: You didn’t trust your own attorneys?
Lebow: Not in this place. Now, needless to say, when that came out, they came and fired me, my attorneys.
Q: Wait, they fired you?
Lebow: They fired me.
Lebow: Because I didn’t confer with them in this negotiation, I suspect. You’ll have to ask them why they fired me. It’s pretty obvious. So, in this Liggett One, in March of ’96, everybody goes crazy. Wall Street says, “What did you do? This is insane.” Etcetera, etcetera. And the truth of all this, I didn’t believe the strategy these tobacco companies are following. I mean none of the strategy made sense. Intellectually, I just didn’t believe it. You have to win every lawsuit. There’s nothing here. We’re never going to lose. And also recognize that Liggett is the smallest of all the tobacco companies. From a financial point of view, I also said to myself, we can’t afford to lose even one lawsuit, one Medicaid case. We go neatly bankrupt. So, from a financial point of view, at this time, I figured it was the right thing to do, to make a settlement. Why stay in court the rest of your life? The other companies have this scorched earth policy that we’re going to spend, and spend, and spend, and spend, and spend, and win and win and win. And I didn’t want to become a satellite of Philip Morris with them paying my legal fees, or a subsidiary of them. When we did this, everybody went berserk.
Q: Didn’t you ever doubt what you were doing?
Lebow: No, I never did. Not for once. I knew it was the right thing to do. I really did have this sense, call it a gut feel, call it what you want, it was the right thing to do. Talking on a personal level, I also see a tobacco company standing up and saying, “Well, cigarettes don’t cause any harmful effects.” What kind of a statement is that? Cigarettes are not addictive… what kind of a statement is that? How can they keep doing this? Then, let me tell you what then happened. I got fired by my old law firm. I told my new lawyers, let’s get these documents everybody is talking about. I want to see these documents. We had not looked at any of these documents, because I didn’t want to confer with my previous attorneys at the time. My new lawyers then took the documents away from the old lawyers, and spent about four or five months studying. And by the end of ’96, the middle of ’96, they came to me and said, Ben, there’s some serious things in these documents. There’s some issues of crime and fraud and all kinds of things, and it’s well known that smoking is addictive, and all these types of things in these documents. I said, “That’s it. I don’t want to talk about it anymore. Let’s get in touch with all the Attorneys General, all the attorneys involved in this thing, and try to negotiate a new settlement for us.” Which we did.
Q: You mean a new broader settlement?
Lebow: A new, broader settlement. And by this time, more Attorneys General had filed lawsuits.
Q: And by then there were 23 states.
Lebow: Originally there were only four or five. Now more had come in, and it had broadened the whole situation. Then, we took about four to six months negotiating. We now come to March of ’97 when we announced a new, broader settlementt with 21 states. Now we’re up to 26 states that have settled with us.
Q: And you’ve agreed at this point, not just on a financial deal, but also to do what?
Lebow: To admit to everything, admit to smoking being addictive, admit to all the health hazards of smoking, to turn over all of our documents, to waive all of our attorney-client privilege. Turn all of our documents over which we did. Immediately, that very day, RJR ran to a North Carolina court to stop me. . . to try to stop us from turning over documents. And we had turned them over to the courts in escrow for the judges to decide whether there is anything in these documents that represents crime or fraud and whether attorney client privilege should be waived, etcetera, etcetera. So, we did all this. And lo and behold, two weeks later, all the attorneys, all the other companies show up at the door of the Attorneys General to negotiate a broader, more comprehensive settlement for themselves.
Q: Let me take you back, again. You indicated then–I’m talking about Liggett One — that you were not doing this out of altruism. You were doing this to help you take over RJR.
Lebow: RJR was saying they couldn’t do a spin off, they couldn’t take out Nabisco and so forth, because of all of these lawsuits. One obvious motive I had was, okay, let’s settle the lawsuits and solve that problem for the shareholders. That’s what got me started looking into it. To really find out what’s going on here, what the problems are. But the more I look. . . And then after the lawyers fired me, and then we got the documents, I mean it was obvious we were doing the right thing. And then the whole thing changed in that regard.
Q: What do you mean?
Lebow: All right, there were two elements to it. First of all, admittedly, the first time we started looking at it, I had economic motivations going into this. And one economic motivation was to get a better deal for Liggett, a better economic deal. Now, in theory I had the idea that if Liggett got a better economic deal…if the other people had to pay more and Liggett had paid less, we’d have a competitive advantage and be able to survive. And at this point, bear in mind that Liggett is going down.
Q: What was happening to your stock?
Lebow: Well, our stock and our sales are going down. And especially, after I did something like this in Liggett One and Liggett Two, the other companies are coming after us, I mean competitively. So, we had to have some sort of economic life preserver to survive, to survive all this onslaught. The other issue they’re talking about is the RJR issue. At the time, back in ’95, ’96, we were involved in this proxy fight, and RJR was saying they can’t do the spin off because of litigation.
So, the most obvious thing for a business man to do, okay, is settle the litigation. There’s no more problem, and we can do this spin off and everybody makes money. So, I was sort of flabbergasted that when we did this, all the shareholders are, “What are you doing?” “This is crazy” But we have the right to spin her off. And as it turns out, a lot of the shareholders also hold Philip Morris stock, own Philip Morris and RJR. And they saw this as possibly hurting Philip Morris more than it would help RJR.
Q: Who are these shareholders?
Lebow: Institutions, major institutions.
Q: Like Fidelity Magellan.
Lebow: Every major institution in the United States you can think of, you know, owns stock in both companies.
Q: Like public employee funds.
Lebow: Yeah, state funds, etcetera, etcetera, etcetera.
Q: So, these are the big heavy hitters in the marketplace?
Q: What I’ve been told by the negotiators, Scruggs, Moore, and others, is that when they brought up the Liggett deals, RJR said, “That’s a deal breaker.” We are not giving — they wouldn’t mention your name — we are not giving them anything. And Philip Morris’ lawyers’ eyes just rolled up to the ceiling.
Lebow: Well, it’s not up to them, it’s up to the President and the Congress to do what’s right here. It’s not up to the tobacco industry. I mean, they don’t make the laws in this country. Yeah, I’ve heard they’ve threatened to walk away from any settlement, tobacco settlement, that Liggett got, the contracts we have. Nothing special. We’re not asking for anything special…all we’re asking for is that our contracts be honored. The deals we negotiated.
Q: They’re paying hundreds of millions of dollars.
Lebow: They’re not paying a penny. They’re paying nothing. Let’s get it straight. They’re raising their prices to cover it. The poor addicted smoker and the U.S. taxpayer is paying. So, don’t yell at me that we’re only paying a couple of million dollars out of our pocket, I don’t see them paying a penny yet.
Q: They’re not paying up front out of their own cash in Mississippi and Florida?
Lebow: They’re raising the prices to get the money back.
Q: And they’re already raising the prices.
Lebow: They already did. They did it last year. they’ve already done it. . .with the new settlement.
Q: I mean, I was amazed that things have changed so fast.
Lebow: Yeah, I was too. I knew it would change. I felt it would change. I thought it would take a little bit longer. But they had the trials coming up, that was the impetus. The Mississippi trials, and the Florida trials coming up. And they should have really done it six months earlier. Because it turned out they didn’t have time.
Q: What do you mean?
Lebow: Well, they really should have settled, I think, a year earlier than they did. Started the negotiations a year earlier, because they’re under the gun with the trials, the Mississippi trials and the Florida trials. They had to go settle with really big numbers, you know, a lot different than it probably would have been a year earlier. And they knew the schedule, they knew these trial schedules. These are all public knowledge. So my opinion is, they should have started the negotiations to settle these things a year earlier. And they could have had time to get it through Congress.
Q: Your perspective was, you guys might lose in court.
LeBow: I started to understand. I never understood before, but I do now. Yeah, there are warning labels on the cigarettes, have been for many years, since 1967 or so. But there was a never warning label that smoking is addictive. That one warning label was not there. You know, when I really focused on it a few years ago, when I heard the Medicaid cases from the Attorneys General, they had a good case…maybe. But why fight? Why not try and work out a reasonable settlement and do the right thing.
Q: But you’re a businessman. You’re not going to pay somebody a lot of money or make such a settlement that will cause all this havoc, unless you were making a bet that they could win.
Lebow: Obviously I was making that bet, yes. Absolutely. I believe they had a strong case. And I believe sooner or later, they’re going to win. And I wanted to settle quickly. Obviously the first person is going to get a better deal.
Q: But once you admit that it does all these things, aren’t you admitting that you’re selling consumers something that could very well kill them?
Lebow: Well, A, it’s legal. But, B, they’re fully informed. Consumers now have full information about everything. All of our documents are released. We’ve waived our attorney client privilege, etcetera, etcetera. I mean, that’s the way it is, that’s the way it’s going to be going forward. And not sold to children, that’s the important thing. And by the way, another thing we’ve said publicly which is important. We’ve said this publicly, and I’ll say it again now, that in 25 to 30 years, we sure will be out of business. Because by definition, if you’re really, really not going to sell to children, they’re not going to have any customers in 25 or 30 years. So, I’d like to hear the other companies make that statement that they intend to be out of business in 25, 30, whatever, a generation. If they’re really, really not selling to children, we’re all going to be out of business.
Q: You’re known as a hard dollars and cents guy.
Lebow: Liggett could not afford to lose one Medicaid case. Because we can’t even afford to post a bond to appeal it. Even though we thought we were right, we had economic motivations in that regard to make a deal, no question about it. But after seeing the documents and understanding these things, I couldn?t just from a moral point of view couldn’t go forward and keep saying that smoking is not addictive.
Q: What did your attorneys tell you?
Lebow: My attorneys told me that these documents became serious evidence, a crime, fraud, obstruction of justice, etcetera, etcetera, and we turned these documents over to the various courts. And so far, three courts have found the same thing. So it’s obviously true. I mean a court in Florida, a court in Minnesota, and even another court I believe, came out with the same type of informations saying these documents have serious problems in them.
Q: And have you turned these documents over to the Department of Justice criminal investigation?
Q: They’ve come here and gotten copies?.
Lebow: Yes. They got them from either our attorneys or from the courts we turned them over to. There’s no issue there.
Q: Have they come here and questioned people?
Lebow: Not to my knowledge. Not that I know have.
Q: No one from Liggett, as far as you know, has been subpoenaed or brought to Washington to testify?
Lebow: I don’t know if I can answer that question because I’m not sure of the legalities. So, I’d rather not answer that. I’m sure some of the people have testified.
Q: So, this could get serious. I mean beyond money, even if you’re willing to reform.
Lebow: Well, it’s well known that the Justice Department is investigating, has some grand jury investigations going. That’s well known. There was, one plea on the nicotine plant issue last week. So, I suspect there’s other things going on. We’ll see what the Justice Department does.
Q: But in the background of all of these discussions about public health and how much in damages and how to change marketing, there still looms this cloud of potential criminal charges.
Lebow: That’s correct.
Q: Do you think that’s motivating anybody in the settlement?
Lebow: My understanding is during their settlement negotiations, they do have criminal attorneys present. They’re trying to get some criminal immunity without totally taking it off the table. So, I’m sure that’s part of the motivations the companies have. We have no concerns over it at Liggett. I mean, I have no personal concerns. And we’re cooperating completely with the Justice Department.
Q: So, when you say, you’re in a sense turning over evidence to the Attorney General, you’re also turning over evidence to the Attorney General of the United States.
Lebow: Oh, yes, absolutely.
Q: What about the so-called stealth amendment — the fifty billion dollar tax deduction if they had to make these settlement payments.
Lebow: Right. Instead of 368 billion, it would be 50 billion. Everybody in Washington just went crazy over that. And it was 96 to 4 in the Senate. The vote was completely lopsided. You don’t do those things in secret like that. You know, it just shows. . .
Q: It was a stealth amendment.
Lebow: It was a stealth amendment.
Q: They showed their power.
Lebow: They tried to show their power, and I think lost a lot of power because of it. I think Congress and the White House — they’ve wakened to the fact that this is not the way things should be done. Things should be done correctly, and I believe that Congress and the White House will do the correct thing going forward.
Q: Let me change the subject on you a little bit, just because we’re focusing to a certain extent on the attorneys general and what happened. When you first met Dick Scruggs and Mike Moore, what did you make of them?
Lebow: I thought they were really crusaders.
Q: Moore was a crusader?
Lebow: Absolute crusader. He was crusading for something he believed in. And I was very impressed by his record. And it turns out he was a hell of a crusader…General Moore. It turns out he was right all along. And I was impressed.
Q: Not your average politician?
Lebow: No, not your average politician.
Q: Why not?
Lebow: He had a focus. He and Dickey Scruggs wanted to accomplish something, and they went for it, you know, all the way. And they did it, and they deserve all the credit that they get.
Q: In a nutshell, what was the importance of these suits by the attorneys general in your mind?
Lebow: I think they’re very important, and I think it’s obviously been proven true. They led the way. It’s gotten people really started thinking. And also they were major in numbers. I mean the amount of money that they were demanding, asking for was quite large. Florida, for example, passed a special statute which took away a lot of tobacco’s traditional defenses. So, I think they were very, very important in the scheme of things.
Q: They, if you will, check-mated the industry.
Lebow: Yeah, as you saw, all the class actions got thrown out. Most of them got thrown out. So, it’s strictly the large lawsuits, the attorneys general lawsuits, that worry the industry. The industry is never afraid of one individual lawsuit. They could always pay, you know, a million dollars here or a half million dollars there, wherever it may be. But the attorney general lawsuits also included RICO charges and punitive damage potential, which really got the industry thinking.
Q: Is it a lesson for other corporations, for other industries?
Lebow: Yeah, I think it should be a lesson. I think all these lawsuits and all this litigation should be a lesson that people should do the right thing and not withhold information. Not withhold over years and years, all these types of things. You sit back and you look at it, it’s kind of ridiculous. We all know cigarettes cause problems. We all know it’s addictive. So, why don’t we disclose all this stuff. Why were all these secret things being done. I mean just on an individual basis, sitting back and looking at this, I don’t understand why they did it.
Q: I don’t think I’ve ever talked to a businessman before who says that he hopes that his business will go away.
Lebow: Well, I hope it goes away. I really, truly hope it goes away. I hope I’m around to see it go away even, at my age. But I really hope it goes away.