The Criminal Investigation Of The Tobacco Industry, Clifford E. Douglas, May 31, 1998
THE CRIMINAL INVESTIGATION OF THE TOBACCO INDUSTRY
Clifford E. Douglas President Tobacco Control Law & Policy ConsultingDraft Of Speech Given At 13th Annual Conference Of The Tobacco Products Liability Project, Northeastern University School Of Law, Boston, Massachusetts
MAY 31, 1998
I. INTRODUCTION
The U.S. Department of Justice, with the assistance of the U.S. Attorney for the Eastern District of New York, currently is conducting a formal investigation of the alleged violation of federal criminal laws by tobacco companies, tobacco company executives, tobacco industry-supported trade and scientific associations, and others who are or have been associated with tobacco companies. The Justice Department initiated the probe after Congressman Martin T. Meehan delivered a 111-page analysis, styled a "prosecution memo," to Attorney General Janet Reno in December 1994. Meehan's brief, which I researched and drafted while serving my first stint as the congressman's special counsel, urged the Justice Department to examine the tobacco industry's conduct with reference to a number of criminal laws, including those proscribing deception of Congress and federal agencies, mail and wire fraud, perjury, deceptive advertising and deception of the public.
I first spoke publicly about the prosecution memo at this conference in December, 1994, just a few days before finalizing it and presenting it with Congressman Meehan to Attorney General Reno.
I'm pleased that, in light of certain events that have taken place in recent months, the Wall Street Journal ran a story in March with the headline "Meehan Brief Leveling Fraud Charges Against Tobacco Firms Gets Credibility," in which it noted that the skepticism that we were initially met with "is gone."
Today I'll discuss why the skepticism is gone, starting with a background discussion of the ins and outs of the pending criminal investigations.
Second, I'll identify some of the implications of the criminal probes for civil litigation, as well as for public and jury-pool perceptions of the industry.
I will then address a topic that has gained increasing attention of late, which is the potential criminal exposure of tobacco industry lawyers.
Finally, I'll discuss where all of this might lead.
II. STATUS OF CRIMINAL PROBES
What is the status of the criminal probes?
Let me start from the end, as it were, and work backwards.
The question I am most often asked these days regarding the Department of Justice investigation of the tobacco industry is, "When will we see indictments?"
It's encouraging, of course, that the question has shifted from "if" to "when," but the "when" question is one of the hardest to answer. As I told the Corporate Crime Reporter earlier this month in an interview that is included in your conference materials, I am optimistic that Justice prosecutors will obtain indictments against major cigarette companies and some of their top officials within the next few months, perhaps even by mid-summer.
Based on the evidence that has been assembled during the past three-plus years, I believe that prosecutions are inevitable. This is especially likely, I think, given the Department of Justice's enormous investment in time, personnel, and resources over the last three years. It is almost inconceivable that Justice would call it quits with nothing more to show for its efforts than a plea bargain with DNA Plant Technology, the small biotechnology company implicated in genetically engineering with Brown and Williamson the high-nicotine tobacco called Y-1.
And as the DNAP cooperation agreement in January essentially forecast, and as "Frontline" recently echoed with its report that Brown and Williamson has received "target" letters from Justice, the makers of Kool and Lucky Strike are likely to be the first on the block.
Now I'd like to give you a snapshot of the federal probes.
In response to Congressman Meehan's request and the disclosure of previously secret internal tobacco company documents that shed light on possible wrongdoing, several federal criminal investigations were initiated, one or more of which have been in progress since the spring if 1995. Indeed, the Justice Department's multifaceted tobacco investigation has been called "one of the most extensive ever of a legal business sector."
Early press reports misconstrued the Justice Department's investigative activities as focusing solely on alleged perjury arising out of testimony delivered by seven tobacco company chiefs before Congressman Waxman's Subcommittee in April 1994. It was reported starting in July 1996, however, that the department was investigating broader allegations that tobacco companies had violated 18 U.S. C. Section 1001 by withholding information and making false statements to federal agencies, including the Food and Drug Administration (FDA). The benefit of the section 1001 obstruction-of-justice theory is that, in contrast to the level of proof required for a showing of perjury, Section 1001 does not require proof that someone knowingly lied under oath. It also allows prosecution for withholding information, providing for a maximum penalty of five years in prison and a $10,000 fine for each false statement.
At least as early as March 1996, department prosecutors were interviewing witnesses, compiling huge company dossiers and issuing subpoenas, all with a green light from top Justice officials, and monitored by Attorney General Reno. At one point, as many as five separate grand juries were considering various aspects of alleged tobacco company wrongdoing. In the face of such activity, tobacco interests hired high-powered legal representation, including former Whitewater prosecutor Robert Fiske, who was retained by Philip Morris to coordinate their response to the Justice Department.
The current status of the various investigations, which was confirmed by Philip Morris in its last 10-K filing with the Securities Exchange Commission in March, is as follows:
- The Washington, D.C. investigation is the most wide-ranging of the investigations. In early 1996, the investigation was moved from the department's main Criminal Division office to the division's Fraud Section, a sign that the probe had gotten underway in earnest.
- The Brooklyn probe, initiated by the U.S. Attorney for the Eastern District of New York, focused on the conspiracy and cover-up associated with the Council for Tobacco Research. That probe is proceeding in coordination with the Washington, D.C.-based investigation.
- The Manhattan investigation, out of the Southern District of New York, which was initiated following publication of a New York Times expose on the Philip Morris nicotine research program in June 1995, which Henry Waxman subsequently read on the floor of the House, focused on whether tobacco companies defrauded shareholders by failing to disclose their knowledge of the hazardous and addictive effects of nicotine. As of July 1995, the Manhattan inquiry had been expanded to a full investigation in which corporate executives had been subpoenaed to testify and turn over documents on nicotine and the health hazards of smoking. The Manhattan probe also scrutinized whether Philip Morris, R.J. Reynolds, and Brown and Williamson made fraudulent representations to the public, particularly in their full-page corporate ads, which appeared after the April 1994 congressional hearing, in which the industry sought to rebut the accusations of nicotine manipulation. The Manhattan probe was incorporated into the Washington, D.C. investigation this year because of their substantial overlap.
- Two other tobacco investigations, now no longer active, were unrelated to those described above. The New Orleans probe dealt with cigarette smuggling. Another in Alexandria, VA concerned the falsification of passive smoking data by a consultant to the tobacco industry.
Starting in 1996, prosecutors and investigations in Washington began to employ techniques typically employed to dismantle drug rings, pressuring current and former mid-level tobacco company employees to turn over information about their superiors.
Last year, the Justice Department increased the resources it was expending on the criminal investigation, assigning a sizable task force of FBI agents and a supervisor from the bureau's white-collar crime unit to review reams of internal industry documents. The investigators were assigned to identify significant inconsistencies between the information provided by the companies and newly available documents.
The Washington investigation has widened in recent months. Subpoena targets have grown to include not only tobacco makers, their lawyers and trade associations, but also advertising agencies, industry consultants, and suppliers, such as the Eastman Chemical Company. (Eastman manufactures cigarette filters and related products.)
Justice acknowledged publicly for the first time late last month some major focuses of its efforts. In announcing its cooperation agreement with the Brooke Group, and its Liggett Group subsidiary, the Department of Justice confirmed that it is examining:
- industry knowledge of the health consequences of smoking cigarettes and the addictive nature of nicotine;
- the targeting of children and adolescents by the industry;
- the manipulation of nicotine by the industry;
- control of research by the Council for Tobacco Research ("CTR"), including special projects conducted under the auspices of the CTR; and
- lawyer involvement in directing research or crafting false or misleading statements by any of the tobacco companies to the Congress, the Food and Drug Administration, and American consumers concerning the above.
I would just observe that this list practically defines the elements needed to bring a RICO prosecution.
A few words about Liggett's becoming an informant for the United States:
- First, the agreement suggests that Justice' investigation is accelerating.
- Second, the agreement represents a real show of strength by the Department of Justice. Liggett wanted immunity from criminal prosecution. It didn't get it.
- Third, the agreement may mark a turning point in the government's effort to build a broad conspiracy case against the largest tobacco companies, which is understood to be industry leaders' worst nightmare. Among other things, prosecutors can use a conspiracy case to break apart joint-defense agreements that would otherwise shield attorney communications.
- One of Liggett's most important concessions is a waiver of attorney-client privilege, which could allow prosecutors to question Liggett lawyers about their involvement in preparing false statements to federal regulators, the Surgeon General, and Congress. (Lawyers could still seek to avoid testifying under the more narrow work-product privilege.)
- The agreement also removes a major roadblock by letting prosecutors question Liggett employees about actions by the company and its competitors in a full and open fashion. My understanding is that, under certain circumstances, Liggett could fire any employees who threatened to invoke the 5th amendment and refuse to answer questions.
The other companies and some Wall Street analysts have downplayed what tiny Liggett can contribute to the Department of Justice's process. What they choose to ignore is that, for decades, Liggett worked hand in hand with the other major tobacco companies to market cigarettes to children, squelch development of less-hazardous products, and mislead the public and the government. It spent years in the inner loop, participating on the Committee of Counsel, and sponsoring the Tobacco Institute and CTR.
More recently, of course, Liggett and its CEO, Bennett LeBow, have admitted that nicotine is addictive and that smoking causes cancer.
Before I move on, I would also like to make a quick comment about the significance of the Minnesota settlement for the criminal investigation.
It's safe to assume that the Department of Justice's prosecutors were watching closely to see what the jury would do, given the substantial similarities between Justice's focus and that of Skip Humphrey's civil case. Had the case gone to verdict and the industry done well, it would have raised concerns for the Department of Justice regarding the jury appeal of its own potential actions.
In light of the settlement and the great concessions made by the industry to reach it, the defendants obviously were very concerned about their prospects before the jury. And they doubtless based their decision on thorough analysis, including the presentation of their case before moot court juries.
Justice cannot help but feel buoyed by the outcome in Minnesota.
III. IMPLICATIONS FOR CIVIL LITIGATION
Until recently, the primary dynamic was that the raft of civil cases fed the efforts of the Justice Department and the U.S. Attorney in Brooklyn. It was a one-way ticket. Discovery in the Castano cases, Mississippi, Texas, Florida and Minnesota served to provide copious quantities of evidence to prosecutors and FBI agents. Most recently this process led, of course, to the government obtaining the 39,000 crime-fraud documents from Minnesota.
The threat of criminal prosecution has, in turn, however, benefited the civil cases, adding weight and heat to our litigation.
1) Consider the Fifth Amendment pleas made by former Philip Morris scientist Thomas Osdene and Brown & Williamson's director of leaf Roger Black. Osdene's refusal to answer questions that might incriminate him came in a deposition taken in the Minnesota case, which was also cross-noticed by Castano lawyers in the Pennsylvania class action. Roger Black's pleas came in the "baby Castano" case in New York, and, like Osdene's testimony, was shown at trial in Minnesota.
2) The criminal investigation has fed interesting lines of questioning in depositions regarding the receipt of subpoenas and other contacts with federal investigators.
3) Numerous reports on the industry's alleged criminality has affected public perceptions, and thus the jury pool.
4) I also understand that certain tobacco company officials that were removed by defendants from the defendants' witness list during the Minnesota trial included company employees who may recently have been granted immunity by the Department of Justice.
In addition, in the event members of the tobacco industry are convicted and those convictions are sustained, civil plaintiffs will in many instances be able to use this against defendants at trial.
On a related note, Dick Daynard and Bob Kline also noted last fall in Tobacco on Trial that the industry settled the Texas case (after insisting it would never do so), "just to avoid a finding by a jury in federal court that the tobacco industry is engaged in a criminal conspiracy. The first issue that would have come before the Texas jury was whether the tobacco industry had violated the RICO Act."
"An adverse ruling on RICO," Dick and Bob observed, "would automatically apply throughout the country under the doctrine of collateral estoppel.' In future cases, plaintiffs wouldn't have to prove that the tobacco companies are crooks; they would just have to prove their damages."
IV. LAWYERS' POTENTIAL CRIMINALITY
I'll move on now to the question of the potential criminal exposure of lawyers for the tobacco industry. As Ann Davis and Milo Geyelin of the Wall Street Journal wrote, upon the release of the 39,000 Minnesota documents, "Tobacco lawyers are in the hot seat."
Along with a number of documents and whistleblower testimony that emerged previously, some of the 39,000 are likely to give prosecutors new insights into how lawyers, executives, and scientists worked together to destroy or suppress damaging scientific information and create bogus pseudo-science to mislead the public and government.
I'm holding one set of documents, just for example, from 1992 showing how lawyers from Wachtell, Lipton, Rosen and Katz in New York discussed with Lorillard's general counsel and Shook, Hardy and Bacon lawyers, a temporary moratorium on new funding for the infamous "Special Projects" at CTR in light of a pending grand jury inquiry into alleged fraud committed by CTR and its cigarette company sponsors.
Participating in this correspondence was Herb Wachtell, who served as the industry's lead settlement negotiator last year. Herb also has held a special place in my heart ever since he deposed me in Philip Morris' libel suit against ABC News for having the temerity to report in 1994 that cigarette companies manipulate nicotine. If you know anything about Herb Wachtell, you won't be surprised to hear that it was a very loud two days.
This correspondence includes an explicit discussion about whether, in light of the "Special Projects" funding moratorium, it would be all right for Lorillard to alternatively fund through a Shook, Hardy and Bacon special account the work of a Georgetown pathologist named Bennett Jensen, who had provided research and testimony favorable to the industry on previous occasions. It states that Shook, Hardy "wants to give Jensen $40,000 to keep him happy and that there is no immediate value to his research."
The Wachtell, Lipton lawyer writing this memo concludes by saying:
"...in my overcautious view, the Jensen issue raises a larger question -- whether CTR Special Projects' funds (and, after such activities were moved out of CTR, joint industry funds administered through Shook, Hardy) were used to purchase favorable judicial or legislative testimony, thereby perpetrating a fraud on the public. Admittedly, this notion of fraud was unknown to the common law, but if we assume the other side of the looking glass...perhaps it is cause for concern. Please advise."
Now, I cite this example because it is fairly recent and you may not have heard about it before. But as you probably already know, there are many other, more damaging documents about the role of lawyers and the activities of the industry Committee of Counsel that have been reported on by the media. There has also been testimony from people like Dr. Gary Huber, a medical doctor who served as an industry consultant for 25 years, who testified in the Texas Case that lawyers, not scientists, have for years controlled much smoking-related research.
The Justice Department and the U.S. Attorney in Brooklyn are examining the role of lawyers. And while lawyers are probably a secondary focus as far as targeting them for indictments is concerned, it remains possible that they will ultimately be charged with committing, or aiding and abetting, conspiracy, fraud, false statements to government agencies and, possibly, RICO violations.
When you think about it, it is interesting to contrast the outcry about "greedy plaintiffs' lawyers" with the relatively little discussion that has taken place regarding the participation of pro-tobacco lawyers in one of the largest conspiracies and cover-ups in the history of American business.
This recalls for me what has become a very prescient observation made by Alan Dershowitz in the ABA Journal in 1991. In an article called "Heroes and Hired Guns," Dershowitz wrote:
"So let's hear two-and-a-half cheers for ambulance chasers, barrators and other assorted legal trouble makers. They do a lot more good for justice, equality and safety -- for society in general -- than many of their more respected brothers and sisters at the bar, who quietly work long and well-compensated hours in the pro malo publico defense of negligent (sometimes quite deliberate) tortfeasors, warrantee breachers, environmental polluters, and other assorted do-badders.
"These are the lawyers who are not vilified enough. They continue to be honored both within and without the bar. To be sure, every defendant is entitled to a defense, but that canon of law is more compelling in the criminal context, where the power of government is brought to bear on an individual, than it is in the context of a corporation, which is being sued by an indigent victim for creating unsafe and polluting conditions.
"Indeed, even in the context of criminal cases, no ongoing criminal organization is entitled to have house counsel -- a consigliari -- who helps it continue its criminal ways.
"Yet many civil lawyers do assist large businesses in continuing their profitable negligence and unsafe practices.
"Consider, for example, the legion of high-priced lawyers who make a living defending the cigarette industry. Unlike other products that do some good, but also create risks, cigarettes do only harm. Tobacco kills and injures more people...each year than all the violent felonies combined. Not only do cigarettes kill smokers, but we now know that they injure nonsmokers.
"No objective, rational person can doubt that there is a close relationship between cigarette smoking and various diseases. Yet these lawyers -- some from the most prestigious firms in our nation -- use every legal device at their vast disposal to bludgeon plaintiffs who are dying of cigarette-related cancer and emphysema. These lawyers are not vilified, but are honored, which makes no sense, except that we generally honor wealth, success and status -- attributes that come with the territory of representing large tobacco companies.
"The point is, if you do it with distinction, without fanfare and with a cum laude degree from an elite law school, there will be few questions asked about the social utility of what is being done."
V. WHERE CRIMINAL PROBES MIGHT LEAD
It is actually possible that the Justice Department, rather than Congress, could turn out to be the 700-pound gorilla that forces historic changes in the conduct of the tobacco industry.
Note that the Department of Justice is focusing not only on tobacco manufacturing subsidiaries, but also on the role of the parent companies -- while the McCain bill was drafted to specifically insulate the parent companies from liability.
Likewise, while Justice is examining the role of the industry's lawyers in connection with the alleged fraud and conspiracy, McCain specifically immunized from civil liability affiliates, officers, directors, and employees, attorneys and agents of tobacco products manufacturers. The only "permissible defendant" would be a tobacco products manufacturer or a surviving entity established by a tobacco products manufacturer. All of this may be up for grabs on Capitol Hill, in light factors ranging from the Gregg-Leahy amendment to the general volatility of the situation, but it does signify the differing orientations of Congress and the Justice Department. Precisely whom Congress goes after will be determined through horse-trading and partisan politics. Whom Justice goes after seems far more likely to be determined based on the merits. If the parent companies are culpable, then they're culpable.
What might the Justice Department do? Once federal prosecutors have their targets right where they want them, they can bring almost limitless creativity to the plea-bargaining process. The corporate sentencing guidelines essentially place no limit on what Justice can impose, and it is likely that any plea agreements would be accepted by the court.
Thus, at the most dramatic level, the Justice Department could require the tobacco companies to change their advertising and marketing practices, stop manipulating nicotine, pay the government billions of dollars, and submit fully to regulation by the FDA.
Interesting dynamic: corporate heads are known for giving up their companies to save their own skin. If Justice gives people like Geoffrey Bible, Andrew Schindler, and Nick Brookes sufficient reason to believe that they could face personal liability, including time in prison, it may motivate industry leaders to make significant concessions.
VI. CONCLUSION
In closing, given the complexity of the process, the extensive paper trail involved, and the high burdens of proof that prosecutors must satisfy, it isn't surprising that the process is taking a long time. In contrast, for example, Microsoft is easy.
Nevertheless, the investigation appears to be progressing nicely.
As Congressman Meehan said recently, while the tobacco industry might have abandoned attempts to work with Congress on legislation, when it comes to the threat of criminal prosecution, "there is no such thing as big tobacco walking away from that table."
Take that, Steve Goldstone.
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