In a forthcoming article, Reforming the Securities Class Action: An Essay on Deterrence and its Implementation, Prof Coffee suggests that the although the damages recovered through securities class actions substantially outstrip the financial penalties levied by public enforcement, there is a deterrence element that is lacking in private enforcement of the federal securities laws and that the costs of such actions are not borne by the actual wrongdoers.
Prof. Coffee notes that "[a]lthough [corporate officers and directors] are regularly sued, they rarely appear to contribute to the settlement. Rather, the corporate defendant and its insurer typically advance the entire settlement amount." He goes on to cite to a forthcoming study of federal securities class action settlements, which found that of the 1,754 class actions settled between 1991 and 2004, there were "only thirteen settlements 'since 1980 in which outside directors made out-of-pocket payments.'" His conclusion - that the corporation and thus its shareholders are wrongfully "punished" in such situations, with little or no deterrent effect on corporate officers and directors.
Prof. Coffee suggests that requiring corporate insiders to contribute more frequently to settlements will provide a much needed deterrent effect, if "the expected penalty, which would include both the financial and non-financial costs of a securities class action settlement, exceed the expected gain [to the insider.]"
As a further incentive to the plaintiff's bar, Prof. Coffee also suggests that "the
court awarding attorneys fees in a securities class action should award substantially higher fees for the portion of the recovery obtained from insiders than on the portion obtained from the corporation."