It's possible students (ignorantly) made their work public because they were proud of their accomplishments. I've done that once or twice under the assumption the course would change for other classes, if only slightly.
That being said, the onus is on the student to make sure they aren't submitting someone's work as their own. I'm not really sure if they understood what they were doing was serious (as in if Coursera was just a bunch of robot drones and they didn't give it much credibility). I know this incident legitimizes Coursera (and it's certificates of completion) in my eyes.
Really I believe all they need to say is, "Look, we really put a lot of work into this to make a good experience for people. We'd appreciate it if you took your answers offline and help make Coursera a respectable name in learning by submitting original work". The whole "We'll start expelling!" doesn't really strike a chord with me. I've been expelled before [not from coursera] for really dumb reasons.
# ALSO, they should take their Honor code out of the ToS. Put it somewhere that people READ!