Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation

Securities class actions impose enormous penalties, but they achieve little compensation and only limited deterrence. This is because of a basic circularity underlying the securities class action: When damages are imposed on the corporation, they essentially fall on diversified shareholders, thereby producing mainly pocket-shifting wealth transfers among shareholders. The current equilibrium benefits corporate insiders, insurers, and plaintiffs' attorneys, but not investors. The appropriate answer to this problem is not to abandon securities litigation, but to shift the incidence of its penalties so that, in the secondary market context, they fall less on the corporation and more on those actors who are truly culpable. This Essay proposes a variety of means to this end involving the settlement process, insurance, and attorneys' fees.