Federal regulators failed to act on “credible and specific allegations” regarding Bernard Madoff’s investment activities Securities and Exchange Commission (SEC) head Chistopher Cox said yesterday.  Cox’s frank admission came as he was announcing an internal probe of the SEC’s oversight of Madoff’s allegedly fraudulent investment business.

As the details of the Bernard Madoff scandal have unfolded, it has become increasingly apparent that the SEC failed in its oversight of Madoff’s business.  The agency had apparently received various tips over the years that questioned Madoff’s activities. The SEC conducted routine examinations of the company in 1999, 2004, and 2005, as well as investigation that ended in 2007.  However, only the 2005 examination found “minor problems”.

The Washington Post said the SEC’s internal investigation will focus, in part, on the relationship between Madoff’s niece, Shana Madoff, and her husband, Eric Swanson.  Shana Madoff served as her uncle’s compliance officer, and Swanson, a former SEC official, was involved in the 2004 SEC examination of Madoff’s business before their marriage, the Post said.  Swanson also conduct an internal review of the 1999 examination.

The SEC maintains that Swanson played no role in any Madoff examinations after his personal relationship with Shana Madoff began in 2006   But according to the Washington Post, Madoff reportedly bragged of their marriage at a conference last year, when he spoke of having “close” ties with regulators.

The 70-year-old Madoff was arrested on one count of securities fraud late last week.  Madoff – once a chairman of the Nasdaq stock exchange – is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.” Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.