Tobacco Settlement Bonds Give Rise to Legal Claims


Many investors suffered losses in 2008 because they owned Tobacco Settlement Bonds. These bonds, which are tax exempt, were sometimes marketed by brokers as “municipal bonds”. They lost up to 50% of their value as a result of Wall Street’s self-induced credit crisis.

Other than their “tax-exempt” status, Tobacco Settlement Bonds have absolutely nothing in common with traditional municipal bonds.

Billions in Tobacco Settlement Bonds were created and sold between 2001 and 2006. After entering into long-term settlement pay-outs as a result of the well-publicized tobacco litigation, many states did not want to wait for their money from the tobacco companies. Enter – Wall Street’s sharpies. Eager to create products and charge investment banking fees, Wall Street offered the states a way to get the money up-front – through their favorite device, “securitization”.

With the help of investment bankers at companies like Bear Stearns, the states set up agencies to sell tax-exempt Tobacco Settlement Bonds to the public. These bonds, which to the uninitiated look like municipal bonds, are not backed by any state’s general credit or its by any state’s general fund – these bonds are backed only by the stream of income that is supposed to come from the tobacco companies over the next 40-odd years.

In creating this new breed of security, the risk of default or diminished payments was shifted from the states onto the backs of bond-buyers. That risk is magnified by the long duration of the bonds (in some cases 45 years), by the complex terms of some of these instruments, and by the fact that the terms of the Master Settlement Agreement between some states and the tobacco companies provide for diminished payments over time if U.S. cigarette sales decline.

The market for these new-fangled bonds suffered horribly in 2008. With credit ratings hovering just-above junk-bond status, and with U.S. tobacco sales way down (and excise taxes on tobacco sales rising), the value of Tobacco Settlement Bonds dropped precipitously in the Fall of 2008. Instead of behaving like municipal bonds, Tobacco Settlement Bonds acted like bad corporate bonds. With their short track-records, very long maturities and uncertainty about the future income streams, some values dropped as much as 50%. Mutual funds that were heavily concentrated in Tobacco Settlement Bonds, such as the Oppenheimer Rochester Funds, also were hit hard.

We have begun accepting cases on behalf of aggrieved investors in Tobacco Settlement Bonds and the funds that owned them. Anyone who bought these securities based on advice or representations that these bonds were in any way equivalent to owning municipal bonds should consider doing so as well. A cost-free consultation with our attorneys is available by telephone