In one of the most stinging criticisms of the Securities and Exchange Commission (S.E.C.) in recent years, Columbia University Professor John C. Coffee, Jr., has now called upon the S.E.C. to hire plaintiffs lawyers on a contingency basis.

Professor Coffee is one of the most respected authorities on securities regulation. He has taught at law schools at Georgetown, Harvard, Stanford, Virginia and Michigan, and is currently teaching at Columbia where he contributes to the Columbia Law School’s Blue Sky Blog. He has testified before Congress on a number of important issues in recent years, including the impact of credit rating agencies on subprime markets, the need for aiding and abetting liability in private securities actions, the Bernard L. Madoff ponzi scheme, and corporate governance after the Supreme Court’s Citizens United campaign finance decision.

Last January, Professor Coffee published a blog post titled “S.E.C. Enforcement: What Has Gone Wrong?” which can be found on Columbia Law School’s blog at www.clsbluesky.law.columbia.edu/2013/01/02/secenforcement-what-has-gone-wrong/.

In the post, Professor Coffee states that a “disturbingly persistent pattern has emerged in U.S. Securities and Exchange Commission enforcement cases that involves three key elements: (1) The commission rarely sues individual defendants at large financial institutions, settling instead with the entity only; (2) when it does sue individual defendants, it frequently loses; and (3) the penalties collected by the commission from corporate defendants are declining and, in any event, are modest in proportion to the profits obtained.”

He calls this a “policy of parking tickets for securities fraud.”

Professor Coffee blames this pattern on “an overworked, underfunded agency that is subject to severe resource constraints.” He observes that the S.E.C. “seems highly risk adverse,” and that by “bringing many actions and settling them cheaply” it can impress Congress. Yet modest settlements, which are often less than the defendant’s gains from illegal activities, leave a persistent incentive to commit fraud.

Finally Coffee notes that these factors do not fully explain why the S.E.C. is losing in court, especially in light of the successes of the U.S. Department of Justice in recent years. Among the causes for the S.E.C.’s track record in court, Coffee cites S.E.C. attorneys’ insufficient trial experience, the S.E.C.’s limited resources to adequately screen cases, and too few attorneys and support staff to run a case against a deep-pocketed corporation with dozens or even hundreds of attorneys. How to fix this problem?

Professor Coffee proposes that the S.E.C. follow the example of other federal enforcement agencies — including the Federal Deposit Insurance Corporation (FDIC) — and retain private counsel on a contingency basis to pursue large complex financial fraud cases. This, he says, “kills at least three birds with one stone: (1) It allows the S.E.C. to acquire highly experienced trial counsel for big cases (without having to pay their salaries for the long term); (2) it economizes on the S.E.C.’s budget by paying the attorney fees only out of any recovery obtained; and (3) it enables privately retained counsel to invest greater time and effort, getting ‘deeper into the reeds of a complex case.’”

Professor Coffee also suggests that the S.E.C. could adjust the attorney-fee formula so as to encourage private counsel to pursue actions against individual defendants.

Twenty-three years ago, the S.E.C. seemed to have fire in its belly, and was willing to go all out to enforce the securities laws. Then S.E.C. Chairman Richard Breedan stated that a Minneapolis lawyer named James O’Hagan, who violated the securities laws, “should be left naked, homeless and without wheels.” Nowadays, the S.E.C. appears so out-gunned, that it leaves the whole financial system to the thieves.

In a follow up reply to a response by the S.E.C., in a blog post entitled, “S.E.C. Enforcement: Rhetoric and Reality,” located at clsbluesky.law.columbia.edu/2013/01/16/sec-enforcement-rhetoric-andreality/. Professor Coffee takes on the S.E.C. for playing with numbers. He points out that while the S.E.C. touts its settlements, roughly 40% of the individual settlements and 44% of the company settlements involved no monetary payments.

Professor Coffee also points out that major S.E.C. actions continue to be settled for what several prominent federal judges have described as “pocket change.” And no senior executive at Lehman, Bear Stearns, AIG or the other major players in the 2008 financial collapse have been named as defendants.

Finally, with the advent of ediscovery, Coffee notes, it is no longer feasible for a handful of S.E.C. attorneys to litigate effectively against the squadrons of associates that a large firm can throw at a complex case. The result is a mismatch.

We agree with Professor Coffee. The S.E.C. should do what other financial regulators are already doing — including the FHFA and the FDIC — namely, hiring independent counsel on a negotiated contingency fee basis.