William Dalrymple on the ruthless rise of the British East India Company

The outrageous story of a group of financiers from a poor and damp island on the outer rim of Europe, who created a private company that became the biggest military and political power in all of India

The Cure for Corporate Wrongdoing: Class Actions vs. Individual Prosecutions

But the story is not quite that simple. In most such class action suits, the monies awarded to the victim shareholders are paid not by the executives responsible for the frauds, but by the companies themselves—which means, in effect, by the current shareholders (or, if the company is in bankruptcy, by its secured creditors).

These current shareholders (or other stakeholders) are as blameless for the fraud as the shareholders they are paying. Indeed, in many instances they are classic small shareholders who purchased their shares before the fraud (and are therefore not part of the plaintiff class) and held on to their shares not only throughout the period of the fraud but thereafter. Unlike hedge funds, which are more adept at getting in and out of an investment, these “retail” investors are now punished twice for the fraud they had no role in committing, first by the decline in the value of their shares upon the fraud’s exposure and second by the large payments subsequently made by the company they own to settle the class action.

.. While there were vague precedents going back to medieval times, and more specific US provisions dating from 1842, a real need for class actions was not perceived until the rise of large corporations and mass production. A mass-produced product with a hidden defect, for example, might not be worth the price paid for it, but no reasonable purchaser was about to spend hundreds of dollars in legal fees to recover the few dollars she had been, in effect, overcharged. She had what Coffee terms a “negative value” claim. Yet if the defective product had been sold to several million purchasers, the collective economic injury was considerable.

.. The driving force was that most intractable of all US problems: combating racial prejudice. In particular, the civil rights movement of the 1960s, to the extent that it sought reform by means of judicial rulings, could be effective only if those rulings benefited similarly situated black persons, i.e., the class of those affected by the racism the litigation was intended to correct, such as segregation in schools or exclusion from obtaining mortgages.

.. For example, class actions against employment discrimination appear to have led to a considerable increase in minority hiring and promotion well beyond what would have likely occurred in their absence.

.. It is hard to believe that the settlements in such cases have much of a deterrent effect on the individual executives who actually committed the alleged misconduct. This is why, in my view, class actions are no real substitute for criminal and regulatory prosecution of the individuals actually responsible for corporate misconduct.

.. In Canada, if the plaintiff loses the case, he must pay the defendant’s often considerable legal fees. And in Australia—which has the most robust class action bar outside the US—contingent fees are prohibited, but private companies, though not themselves plaintiffs, are permitted to fund such actions and thereby absorb the risk.