FACTBOX: SEC missteps in handling Madoff fraud tips

Harry Markopolos, a former financial executive, testifies before a House Financial Services Subcommittee on ''Assessing the Madoff Ponzi Scheme and Regulatory Failures'' in Washington,February 4, 2009.

WASHINGTON (Reuters) - U.S. securities regulators repeatedly bungled tips that could have led to the discovery of Bernard Madoff's $65 billion investment fraud, according to an internal watchdog report released on Wednesday.

Included below are some of the missteps highlighted in the report from the inspector general of the U.S. Securities and Exchange Commission:

* Between June 1992 and December 2008, when Madoff confessed, the SEC received six "substantive complaints that raised significant red flags" about Madoff's hedge fund operations.

* The SEC was also aware of two articles regarding Madoff's investment operations that appeared in reputable publications in 2001 and questioned Madoff's unusually consistent returns.

* The SEC conducted two investigations and three examinations related to Madoff's investment advisory business, but at no time did the SEC verify Madoff's trading through an independent third party or ever conduct a Ponzi scheme probe.

* In 1992 the SEC suspected that a Madoff associate -- Avellino & Bienes -- had been conducting a Ponzi scheme, but the agency focused its efforts on the associate and never thoroughly scrutinized Madoff's operations, even after learning the investment decisions were made by Madoff.

* In the 1992 examination of Madoff, the SEC sought records from the Depository Trust Co, but sought copies through Madoff. Had the SEC examiners sought the records from the DTC, "there is an excellent chance that they would have uncovered Madoff's Ponzi scheme in 1992."

* In 2004 and 2005, the SEC conducted two parallel examinations of Madoff after a complaint, but "astoundingly" the different examination teams did not know the other examination was occurring until Madoff told them.

* During the course of the examinations, the teams discovered suspicious information and caught Madoff in contradictions. But the teams either disregarded the concerns or simply asked Madoff about them, accepting his "seemingly implausible" answers.

* In one examination, an SEC official sent a document request to a financial institution that Madoff claimed he used to clear his trades. The official received a response that there was no transaction activity in Madoff's account during the period in question, but the official did not follow up.

* Both examinations concluded with numerous unresolved questions and without any significant attempt to probe whether Madoff had misrepresented his trading.

* Regarding highly detailed complaints from Harry Markopolos that accused Madoff of operating a Ponzi scheme, the relatively inexperienced SEC enforcement staff failed to appreciate the significance of the complaint's analysis and "immediately expressed skepticism and disbelief."

* The SEC enforcement staff, like the examination staff, immediately caught Madoff in lies, but failed to follow up.

* The enforcement staff made attempts to seek information from independent third parties, but failed to follow up.

* Madoff proactively informed potential investors that the SEC had examined his operations, using the information to calm any fears about the safety of an investment with him.

(Reporting by Karey Wutkowski, editing by Gerald E. McCormick)