Nov. 19 (Bloomberg) -- U.S. Securities and Exchange Commission sanctions fell to the lowest level since 2002 after Republican commissioners complained that heavy penalties hurt investors and the agency brought fewer billion-dollar accounting fraud cases.

The SEC, led by Chairman Christopher Cox, extracted about $1.6 billion in fines and illicit profits in the year ending Sept. 30, compared with more than $3 billion in each of the previous three years, according to a report the regulator released Nov. 15. In 2002, when Congress passed the Sarbanes- Oxley corporate governance law, the total was about $1.4 billion.

``The cases they're bringing these days are much smaller,'' said James Cox, a securities law professor at Duke University in Durham, North Carolina, who isn't related to the SEC chairman. The commission has adopted ``a new ethos about penalties,'' based on the concern that ``savaging'' companies with fines amounts to punishing their investors, he said.

The SEC ratcheted up financial sanctions more than 40 percent after Sarbanes-Oxley stiffened audit requirements in response to accounting scandals at Enron Corp. and WorldCom Inc., the agency's data show. The surge sparked a partisan dispute at the agency with Republican Commissioner Paul Atkins saying costs are borne by shareholders and former Democratic Commissioner Roel Campos countering that penalties deter fraud.

Business groups have complained about the punishments. The Committee on Capital Markets Regulation, chaired by President George W. Bush's former economic adviser, Glenn Hubbard, and ex- Goldman Sachs Group Inc. President John Thornton, wrote in a 2006 report that fines ``have grown disproportionately large relative to their deterrent benefit.''

`Operational Reality'

Cox, who served in Congress for 17 years as a California Republican, stepped into the debate after being sworn in as SEC chairman in August 2005. The commission adopted new corporate penalty guidelines five months later.

As a result, the agency now weighs ``the presence or absence of a direct benefit to the corporation and the degree to which the penalty will recompense or further harm injured shareholders,'' Cox told the House Financial Services Committee in June.

The decline in sanctions shows that the new policy ``was not merely an aspiration, it is an operational reality,'' said former SEC General Counsel James Doty, now a partner at Baker Botts LLP in Washington.

AIG, Fannie Mae

Cox, 55, also set up a procedure this year that requires the agency's enforcement staff to seek approval from commissioners before negotiating corporate fines. Previously, SEC attorneys could enter into settlement talks without obtaining permission in advance.

In response to written questions about the drop in financial penalties, the SEC's Cox said massive corporate frauds hadn't emerged during the year.

``While we're fortunate the year didn't witness a fraud on the scale of WorldCom or last year's $400 million Fannie Mae settlement, we won the highest number of corporate penalties in SEC history in 2007,'' Cox said in an e-mailed statement.

The SEC's enforcement tally in 2006 was boosted by an $800 million sanction against American International Group Inc., the world's largest insurer, and the $400 million penalty for Fannie Mae, the mortgage-finance company. The SEC accused both of accounting fraud. AIG, based in New York, restated $3.4 billion of past earnings in 2005. Washington-based Fannie Mae reported a $6.3 billion restatement last December, after settling with the SEC.

`Longer to Process'

This year's biggest cases against publicly traded companies included a $50 million fine against Freddie Mac, Fannie Mae's smaller rival, and a $45 million penalty against ConAgra Foods Inc., the Omaha, Nebraska-based maker of Chef Boyardee pasta.

Other large cases included an $81 million settlement with HealthSouth Corp. founder Richard Scrushy. The agency and former New York State Attorney General Eliot Spitzer reached a $208 million accord in December with Deutsche Bank AG, Germany's biggest bank.

``I don't believe that lower penalties imposed by the SEC indicate that there is less fraud,'' said Campos, 58, who stepped down in September after five years at the agency.

``There have been many cases that have taken longer to process because of the very careful approach that this particular chairman has undertaken,'' said Campos, a partner at Cooley Godward Kronish LLP in Washington. ``Many of these cases are still under consideration and haven't been issued.''

Public Relations

The SEC brought 656 cases in fiscal 2007, 14 percent more than the previous year, according to its Nov. 15 report. The numbers show that the agency ``continues to be the gold standard of securities law enforcement,'' Chairman Cox said.

The SEC's 2007 sanctions included about $507 million in fines, down from about $975 million in the previous period. Disgorgement of ill-gotten gains fell to about $1.1 billion from about $2.3 billion.

``The amount of money violators improperly obtained determines the amount they are required to pay for their offenses,'' SEC spokesman John Nester said. ``Financial penalties on top of paying back any ill-gotten gains are determined by numerous factors, including the egregiousness of the fraud and investor harm.''

Atkins, 49, issued an Oct. 15 statement calling a $35 million penalty imposed on Nortel Networks Corp. for allegedly manipulating its earnings a ``public relations gesture'' that did nothing to protect investors. He wasn't immediately available to comment, according to Hester Peirce, a member of his staff.

The Message

The ongoing debate goes to the core of the SEC's role in combating fraud, said former SEC Commissioner Harvey Goldschmid, 67, a Democrat who left the agency in 2005 and is now a professor at Columbia Law School in New York.

``There have been lessons taught to the business community in recent years and the decrease in penalties could reflect the students getting the message,'' Goldschmid said. ``The issue is whether the decrease in civil money penalties and disgorgements will send the wrong message and decrease accountability.''

To contact the reporter on this story: David Scheer in Washington at dscheer@bloomberg.net; Jesse Westbrook in Washington at Jwestbrook1@bloomberg.net.

Last Updated: November 19, 2007 15:20 EST