NEW YORK (Bloomberg) — Bernard Madoff thought regulators had caught him in 2006 and was "astonished" US Securities and Exchange Commission investigators never followed up on information he gave them, the agency's internal watchdog said.

Madoff, 71, told Inspector General H. David Kotz's office this year that after being questioned in May 2006 and giving his account number at Depository Trust Co., an independent clearing agency, "I thought it was the end game, over. Monday morning they'll call DTC and this will be over."

When that never happened, Madoff was "astonished", according to a summary Kotz issued yesterday. The Ponzi scheme continued for two-and-a-half years.

"This was perhaps the most egregious failure in the enforcement investigation of Madoff," Kotz's report said. "They never verified Madoff's purported trading with any independent third parties."

By checking with the clearing agency, the SEC would have "immediately realised that Madoff was not trading in anywhere near the volume that he was showing on the customer statements".

The Kotz report detailed repeated missed opportunities by the agency after being alerted to Madoff's Ponzi scheme activities at least six times dating back to 1992. The SEC assigned inexperienced lawyers to the investigation, supervisors denied requests of examiners to expand their review and staff withdrew a request for information from a third party on grounds a review of the data would be "too time-consuming", Kotz said.

The inquiry is the most exhaustive look yet into the SEC's failure to detect the world's biggest Ponzi scheme, the $65 billion fraud that spanned decades and burned thousands of investors, including universities, charities and affluent clients. Lawmakers crafting a regulatory overhaul have awaited Kotz's findings since agency officials rebuffed questions at hearings in January and February, citing the continuing inquiry.

"It is a failure that we continue to regret," SEC chairman Mary Schapiro said in a statement, adding that the agency is overhauling its enforcement and inspection units and reforming how it handles tips.

The SEC case is a "colossal blunder", Representative Paul Kanjorski, a Pennsylvania Democrat and chairman of a subcommittee on capital markets, said in a statement yesterday. Representative Spencer Bachus of Alabama, ranking Republican on the House Financial Services Committee, said the report shows "institutional failure on a grand scale".

SEC staff and supervisors "consistently demonstrated they were inexperienced, inept and easily duped," said James Cox, a law professor at Duke University in Durham, North Carolina. "These were to a person, and there were many, individuals who seemed content to punch the clock but not push the investigation in any meaningful way."

While Kotz's report portrays SEC enforcement staff as inexperienced and naïve, it doesn't find that senior officials tried to improperly influence or interfere with inquiries.

"It breaks my heart," Harvey Pitt, SEC chairman 2001-2003 and now chief executive officer of Kalorama Partners, said on Bloomberg Television. "Even Madoff was astonished that he could talk his way out of some of this; that makes it even more painful."

Arthur Levitt, SEC chairman 1993-2001 and a board member of Bloomberg LP, the parent of Bloomberg News, said the agency "slipped up big time" in failing to act on Madoff complaints.

"Any of us associated with that agency, from chairman on down to the lowest level, bears some portion of the responsibility and some large portion of the embarrassment," Levitt said in an interview Bloomberg Television.

SEC investigators had met Madoff in response to complaints, including a 2006 session where he was asked how he achieved his returns on investment. "Madoff never really answered the question," Kotz wrote. "Madoff claimed his remarkable returns were due to his personal 'feel' for when to get in and out of the market."

Because the staff lacked understanding of options trading, "they did not appreciate that Madoff was unable to provide a logical explanation for his incredibly consistent returns", Kotz wrote. "Each member of the enforcement staff accepted as plausible Madoff's claim that his returns were due to his perfect 'gut feel'."

Madoff also tried to impress and intimidate SEC examiners.

Throughout an examination by the SEC's Northeast regional office in New York of Madoff's firm in April 2005, "Madoff would drop the names of high-up people in the SEC", Kotz wrote. Madoff told examiners Christopher Cox was going to be chairman three weeks before Cox was named, and claimed he himself "was on the short list" to be chairman. When examiners sought documents he didn't want to provide, Madoff became angry, and his "veins were popping out of his neck".