Five years after the passage of the Sarbanes-Oxley Act, the Securities and Exchange Commission has increased its civil enforcement efforts, but the agency is collecting less in penalties from companies, and federal prosecutors are bringing fewer criminal cases.

During the 2007 fiscal year that ended Sept. 30, the SEC brought 656 enforcement cases, a 14 percent increase from the 574 cases in 2006, according to Bloomberg News. The increase--the first in four years--stems in part from the 24 cases the agency brought over the alleged backdating of stock options.

“There are still more to come,” Linda Thomsen, the SEC’s enforcement director, said at a Nov. 10 law conference in New York, according to Bloomberg News. “My hope is we will get a lot more done” over the next year, she said.

Overall, more than 200 companies have disclosed internal or federal probes into past option grants. However, the SEC has concluded probes at more than 31 firms without recommending any enforcement action--which should be good news for companies and directors who are facing investor lawsuits. Peter Stone, a defense lawyer with Paul Hastings Janofsky & Walker, told The Recorder legal newspaper that “the existence of an ongoing formal SEC investigation is a significant factor in settlement discussions with plaintiffs.”

Among the recently cleared firms are: Electronic Arts, Interwoven, Linear Technology, Zoran, Computer Sciences, PMC Sierra, VeriSign, Sunrise Telecom, and Sunrise Senior Living, according to Bloomberg News.

During fiscal 2007, the SEC also filed 47 insider-trading cases over suspicious trading before the release of buyout news; those actions included cases against former employees at UBS, Morgan Stanley, and Bear Stearns, Thomsen said.

The number of SEC actions also was boosted by the 39 orders that the agency issued in September against accounting firms and individuals who allegedly audited public companies without registering with the Public Company Accounting Oversight Board.

At the same time, the agency is collecting less in fines and penalties from companies and corporate officers. During the 2007 fiscal year, the SEC collected $1.6 billion in penalties and illegal profits, down from more than $3 billion in each of the previous three years, Bloomberg News reported, citing an agency report released Nov. 15.

“The cases they're bringing these days are much smaller,” James Cox, a securities law professor at Duke University, told Bloomberg News. “The commission has adopted “a new ethos about penalties,” based on the concern that “savaging” companies with fines amounts to punishing their investors.

The SEC adopted a new corporate penalty policy in early 2006 after corporate advocates and Republican Commissioner Paul Atkins complained that the penalties were disproportionately high and ultimately were hurting shareholders. Earlier this year, Chairman Christopher Cox directed the agency’s enforcement division to obtain commission approval before negotiating corporate fines.

When asked by Bloomberg News about the decline in total fines, Chairman Cox noted that there wasn’t a major corporate fraud settlement this year. In 2006, the agency collected an $800 million penalty from American International Group and obtained a $400 million settlement from Fannie Mae.

The decrease in corporate penalties ultimately is a significant issue for investors, because much of this money is eventually distributed to investors through the SEC’s Fair Fund program, which was created by the Sarbanes-Oxley Act. The SEC has returned more than $3.2 billion to investors since 2002.

A continued decline in corporate penalties may undermine the arguments of class-action litigation critics, who contend that only the government should be permitted to recover damages for investors. Investor lawyers, including Fred T. Isquith of Wolf Haldenstein Adler Freeman & Herz and Jay Eisenhofer of Grant & Eisenhofer, have countered by pointing out that the SEC doesn’t have the resources to fully protect shareholders and that private lawsuits typically generate greater recoveries. (For more on these arguments, please see the March and April 2007 editions of the SCAS Alert.)