US: Judge Rules in Favor of Reynolds Tobacco in Lawsuit over Nabisco

Source from:  Winston-Salem (NC) Journal  03/04/2013

A federal judge has ruled in favor of R.J. Reynolds Tobacco Co. in a nearly 11-year-old lawsuit involving its former affiliation with Nabisco and 3,500 current and former employees.

The lawsuit was filed in May 2002 by Richard Tatum of Winston-Salem in U.S. District Court in Greensboro.

Judge Carlton Tilley Jr., of the Middle District of N.C., dismissed the lawsuit with prejudice, meaning the case cannot be refiled later. The plaintiffs, however, can appeal.

His ruling came about 4½ years after he granted the employees' request to participate in a class-action lawsuit.

The lawsuit alleged Reynolds failed to live up to its duty as trustee of its 401(k) retirement plan by selling Nabisco stocks at a loss in January 2000.

At its essence, the lawsuit was about whether the fiduciaries of the Reynolds plan "undertook the appropriate investigation into the prudence of removing the Nabisco funds from the tobacco plan" and whether "prudence would have compelled a fiduciary to maintain the Nabisco funds as frozen funds in the plan."

Robert Elliot of Elliot Pishko Morgan in Winston-Salem, an attorney for Tatum, said in 2008 that potential damages could have reached into "the multimillions of dollars." Elliot could not be reached for immediate comment Friday.

Reynolds spokesman David Howard said Friday the company "is pleased with the court's opinion that R.J. Reynolds Tobacco Holdings Inc. reached an appropriate decision to eliminate the Nabisco Funds from its 401(k) plan in January 2000."

Tilley determined Reynolds breached its duty to properly investigate the investment decision to eliminate the Nabisco funds from the tobacco plan, including not discussing the option of allowing the Nabisco stock to remain frozen indefinitely.

However, Tilley said plaintiffs also had to prove Reynolds' trustee for the 401(k) "knew more than they did" in making the decision that caused financial loss to the plaintiffs.

Reynolds, in turn, had to prove that its decision to remove the Nabisco funds was objectively prudent, which Tilley ruled Reynolds had done.

The background began in 1999 when RJR Tobacco was spun off from RJR Nabisco.

After the spinoff, RJR Nabisco was renamed Nabisco Group Holdings and traded under the ticker symbol "NGH." Its main asset was its 80.5 percent ownership stake in Nabisco.

The remaining 19.5 percent of ownership in Nabisco was sold in a public offering of stock in 1995. Those shares traded under the ticker symbol "NA."

Before the spinoff, RJR Nabisco employees were able to invest in single-stock funds for RJR Nabisco and Nabisco.

After the spinoff, the RJR Nabisco fund became a Nabisco Group Holdings fund. RJR Tobacco employees could not invest in these Nabisco funds, and eventually Nabisco stock funds that RJR Tobacco employees had invested in were divested by RJR Tobacco.

Tatum's lawsuit claims he asked that retirement-plan participants be able to keep their investments in Nabisco. The lawsuit said Nabisco stocks endured a rough time after the spinoff, and by Jan. 31, 2000, they were trading at very depressed levels. The lawsuit points out the Nabisco stocks eventually rebounded from their lower levels.

"It has been our contention all along that no prudent person would've sold the Nabisco stocks at that point in time," Elliot said in 2008.

Tilley wrote in his ruling that "in this case, while the original purpose of separating Nabisco from RJR was to free the Nabisco stock from the tobacco taint, Nabisco stock steadily declined in value from the date of the spin-off until the date of divestiture."

Tilley said because of the tobacco taint over Nabisco, particularly pending smoking litigation involving Reynolds, "there was no information or market activity with respect to Nabisco that would have led a fiduciary to believe the tobacco taint was going away any time soon."

"Some analysts saw the stock as undervalued and thus one to acquire; others felt it was fully valued and high risk. While Tatum has presented evident that it might also have been prudent to maintain Nabisco as a frozen fund in the plan, having a prudent alternative does not, under the circumstances, make RJR's decision imprudent."

Tilley also addressed the interest of hedge-fund investor Carl Icahn in Nabisco's stock. Tilley said Icahn's interest – which led to a bidding war on the company and its stock – "did not create a consensus among analysts that the Nabisco stocks were undervalued, nor did it create a reaction in the market." Enditem