An adverse ruling for the tobacco industry in a Florida lawsuit last week sent tobacco stock prices reeling, but Philip Morris executives may have seen this coming a few months ago.
On 20 October a panel of three judges unanimously agreed that Philip Morris Companies and other defendants in the Engle v R J Reynolds class action lawsuit must face punitive damages in one lump sum instead of on a “case by case basis”. The damages, which could exceed $300bn (£187bn), are to be awarded as a result of last July's verdict holding the companies liable for between 500000 and one million sick smokers. They will be subject to appeal.
The decision to allow the companies to face a huge damages award was originally made in August but was overturned on appeal in a September ruling. Last week's ruling restored the original August decision and sent tobacco stock prices into a tailspin. “This is an all time low for both Philip Morris and R J Reynolds,” said Martin Feldman, Wall Street analyst of Salomon Smith Barney.
But Philip Morris executives may have seen the writing on the wall after the original decision in early August and acted accordingly to salvage their own portfolios.
Between 16 August and 31 August, in a move virtually unnoticed by the public, eight company insiders disposed of a total of over 750000 shares of Philip Morris stock. Philip Morris's chairman and chief executive officer, Geoffrey Bible, personally disposed of 314709 shares in August. The shares that the executives sold were acquired via stock options and could have been exercised a few years ago. Evidently, they originally intended to hold on to the stocks, expecting that the price would continue to rise.
Their decision to sell the shares in August for around $36-$38 each may have saved the executives millions of dollars as the stock price fell to as low as $21.25 per share after the latest court ruling.
It is not unusual for tobacco stock prices to drop in response to news about tobacco legal liability or regulation, but it is unusual for the major stockholders in a leading tobacco company to take such drastic action.
Professor Richard Daynard, a tobacco liability expert from Northeastern University in Boston, believes that the explanation for the sell off is obvious: “The natural suspicion is that they knew in August that their stock would ‘tank’ once the investment community understood the implications of the 2 August ruling. Of course, that's exactly what happened when the appellate court refused on 20 October to undo the trial court's order.”
The long term impact may be dramatic for public health as well as for investors. According to Professor Daynard, “this downturn in stock prices is different from the usual ups and downs because the investment community finally understands that bankruptcy for the tobacco companies—including Philip Morris, the biggest of them all—is a real possibility.”
Figure.
AP PHOTO/RICHARD DREW
Traders on the New York stock exchange: Philip Morris's share price has fallen almost 40%since August