The Billionaire and the $200 Billion Lawsuit

"Yesterday, all my troubles seemed so far away,”

-Big Tobacco, with help from Paul McCartney

 

On Monday, light smokers solved the age old riddle, “If you don’t have your health, what do you have?”

 

The answer: class action lawsuits and big payouts.

 

Of course, they didn’t come up with this on their own. They got by with a little help from a Federal Judge in Brooklyn, who allowed a $200 billion class action lawsuit between millions of light cigarette smokers and Big Tobacco to move forward.

 

I don’t mean to be glib here. It’s just that I find this situation so fascinating. The smokers aren’t charging Big Tobacco with health or physical damages… no, they’re suing these companies for fraud.

 

Simply put, the suit alleges that Big Tobacco marketed light cigarettes as healthier alternatives to regular cigarettes, while secretly knowing that they’re just as bad. Should the jury find Big Tobacco guilty, the industry will pay out some $200 billion in damages. The case will also open the door for similar cases in the future, potentially bringing the tobacco industry’s turnaround from earlier legal woes to a standstill.

 

Shares of tobacco companies tanked as investors dumped their positions on the news. Industry leader, Altria Group (MO) who owns Phillip Morris, lost three month’s worth of gains in a matter of hours.

 

However, the investing legends already beat Joe Investor to the punch on this one.

 

Beaten up and massively profitable, big tobacco companies have gotten a lot of attention and capital from investing legends in the wake of their first round of legal troubles. In particular, Mexican billionaire Carlos Slim Helu had built up a massive stake in Altria.

 

If you’re unfamiliar with Helu, he’s the third richest man in the world; worth some $30 billion. Since the fall of 2005, Helu has been dumping his position in Altria like bad takeout.

 

 

 

Am I implying that Helu knew what was coming? On one level, yes: the lawsuit allowed on Monday was first filed back in 2004.

 

However, the more salient point is that investors who follow insider transactions (Helu is a former director at Altria) would have noticed a massive “Sell” signal when Helu dumped $195 million worth of the company’s stock. Those who followed Helu wouldn’t have sold at the exact top… but they wouldn’t have gotten a $200 billion surprise on Monday either.

 

Good trading,

 

Graham

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