BOSTON/WASHINGTON (Reuters) - US securities regulators missed "numerous" red flags that may have led to Bernard Madoff's $65 billion Ponzi scheme and never did a "thorough and competent" probe despite complaints dating to 1992, a federal watchdog has concluded.

The US Securities and Exchange Commission's inspector general said in a blistering report that despite five probes into Madoff's activities and catching him in "lies and misrepresentations", the SEC failed to follow up on inconsistencies.

"Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme." Inspector General David Kotz wrote. The SEC also resisted whistle-blowers' efforts to help, he said.

A summary of the report was released yesterday and posted on the SEC's website, http://www.sec.gov/spotlight/secpostmadoffreforms/oig-509-exec-summary.pdf. The full 450-page report is due tomorrow.

Kotz said his investigation had not found evidence of improper ties between the SEC and Madoff that interfered with the SEC's examination or investigatory work.

He said he had not found that former SEC Assistant Director Eric Swanson's romantic relationship with Madoff's niece, Shana Madoff, had influenced the SEC's conduct.

Kotz said the SEC's "most egregious" lapse was its failure not to verify Madoff's purported trading with any independent third parties, even after it took testimony from Madoff himself in May 2006.

Madoff later admitted that he thought it was "game over" after testifying to having cleared his trades through the Depository Trust Co, part of the U.S. Federal Reserve, and provided his account number. He said he was "astonished" that the SEC did not follow up.

Kotz quoted one senior-level SEC examiner as saying: "Clearly, if someone ... has a Ponzi and they're stealing money, they're not going to hesitate to lie to create records," and thus "some independent third-party verification" such as through the DTC would be essential.

He also said the SEC made a "surprising discovery" earlier this decade that Madoff's hedge fund business was making far more money than his better known market-making business, but that no one thought this was a "cause for concern".

The SEC's lapses in dealing with Madoff have prompted the agency to implement reforms, including increased use of subpoenas.

Mary Schapiro, who became SEC chairman after Madoff's fraud was uncovered in December 2008, said in a statement yesterday that while the reforms should help, "the public deserves a full accounting of why the agency did not detect the Madoff scheme."

A Ponzi scheme is where money from later investors is used to pay off earlier investors. Prosecutors said that for years Madoff appeared to be rewarding his customers with steady investment returns, but he was faking their account statements and did not place trades on their behalf.

Madoff pleaded guilty in March to orchestrating his Ponzi scheme, and is serving a 150-year prison term.

Linda Chatman Thomsen, the SEC enforcement chief when the Ponzi scheme was uncovered in December 2008, is now a partner at Davis Polk & Wardwell LLP in Washington, D.C. She did not return a call seeking comment. Harry Markopolos, who tried to warn the SEC about Madoff, was not available for comment.

Christopher Dodd, chairman of the Senate Banking Committee, announced that there would be a September 10 hearing on Kotz's findings.

"We will use this report to learn what went wrong and figure out how best to get things right," the Connecticut Democrat said.

Sen. Charles Grassley, an Iowa Republican, called the SEC's failures "further evidence of a culture of deference toward the Wall Street elite at the SEC".

"Until that culture is transformed, the SEC will not be the tough cop-on-the-beat that the public needs," Grassley said in a statement.