PUT OUT THE BUTT, JUNIOR

By Richard Lacayo

For the tobacco industry, the White House Rose Garden was exactly the wrong place for President Bill Clinton to announce new restrictions, as he did last week, on the sale and advertising of cigarettes. These days, absolutely nothing is coming up roses for Big Tobacco. All year it's been battered by mounting lawsuits and seesawing stock prices. And now the new rules, part of a bid to stop smoking among teenagers, establish a precedent the industry has feared for decades. Clinton signed an Executive Order that subjects tobacco to regulation by the Food and Drug Administration. As a twist of the knife, the FDA claims its new authority over cigarettes by defining them as the delivery system for an addictive drug, nicotine. Alphabetically, that would put it after morphine and right before opium. Not exactly wholesome company.

"Joe Camel and the Marlboro Man will be out of our children's reach forever," said Clinton--hopefully. The changes, first previewed last summer, are likely to be tied up in the courts for years. If they take effect, cigarette sales would require a photo I.D. offering proof of age. In magazines read by a significant number of teens, tobacco ads would be limited to a black-and-white, all-text format--no photographs, no cartoon camels with phallic snouts. The same rules would apply to billboards, which would be banned entirely within 1,000 ft. of schools or playgrounds. Sponsorship at sporting events would be forbidden. Likewise tobacco-brand-name logos on products such as hats, T shirts and gym bags.

As policy, it's all a response to the fact that in a nation where a quarter of the adult population smokes, 90% of all new smokers are under 18. As politics, it's part of Clinton's year-long strategy to identify with family issues like school uniforms and V chips. So much the better that his announcement was able to divert attention from the release earlier in the week by the Department of Health and Human Services of a report that teenage drug use has risen sharply since 1992.

Even before this latest attack, tobacco was in a droop. After years in which the industry beat back lawsuits from health-impaired smokers, it lost a worrisome one earlier this month. Following the disclosure of documents showing that industry executives sought to hide their knowledge that their product was addictive, a Florida jury awarded $750,000 to a longtime smoker who developed lung cancer. Though an Indianapolis, Indiana, jury handed the tobacco industry a break late last week by finding it not guilty in a similar case, more than 200 individual lawsuits nationwide await, plus 14 by states that are suing tobacco companies to retrieve tens of billions of dollars in Medicaid costs for smoking-related illnesses.

So Wall Street is wondering. Could tobacco really become the next asbestos? "It's certainly not an area where an investor can jump in," says Alan Ackerman, a market strategist at Fahnestock & Co. While stock prices of the big tobacco firms used to rebound quickly after bad news, August has been the long goodbye. Philip Morris plunged from $104.66 a share to $88, and RJR Nabisco from $30.75 to $25.50. Loews Corp., parent of Lorillard Tobacco, slipped from $80.66 to $74.75. "This has all the makings of a tobacco Chernobyl," says Ackerman. Not if you ask the accountants. Overall, profits and sales in the industry are up this year, and sales abroad are strong.

Tobacco is not a potted plant--it doesn't take attacks quietly. No sooner were the FDA regulations previewed last summer than the industry filed suit in a North Carolina federal court to stop them, arguing that the agency has no authority to oversee cigarettes.

Tobacco firms have also become heavy donors to the Republican Party, an investment that already has paid off in the G.O.P.-controlled Congress, with its hostility toward government regulation in general and the FDA in particular. Thanks to a bill approved earlier this year, Congress has 60 "legislative days" to overturn any agency regulation.

The industry also plans to fight the new advertising rules in court as an unconstitutional restriction on free speech. Earlier this year the Supreme Court struck down a state law that banned the mention of liquor prices in advertising. "The evidence is clear," says Brennan Dawson, spokesperson of the Tobacco Institute, "that the FDA's rules do not address the reasons youngsters smoke, will not work to reduce youth access to tobacco, and are an illegal expansion of this federal agency's authority." Or as they used to say in those old cigarette commercials, we'd rather fight than switch.

--Reported by Bernard Baumohl/New York, J.F.O. McAllister and Adam Zagorin/Washington

With reporting by BERNARD BAUMOHL/NEW YORK, J.F.O. MCALLISTER AND ADAM ZAGORIN/WASHINGTON