As readers who have been following this story know, the SEC conducted a number of reviews of Bernard Madoff's brokerage business over the last decade, and found no serious problems.

But if the SEC can be said to be on trial, one recent investigation may be emerging as Exhibit A for the prosecution.

That's the one, highlighted by the Wall Street Journal this morning, that begun in 2006 in response to a long and detailed complaint from Harry Markopolos, a rival broker, and wrapped up the following year with its only significant action being to require Madoff to register as an investment adviser.

But is it fair to blame that SEC team for falling down on the job? And was the wrap on the knuckles ultimately prescribed by the commission an example of Madoff getting special treatment?

To a lay person, the details of the case appear pretty damning. In an SEC enforcement document entitled "Case Closing Recommendation" and posted by the Journal, an SEC staffer wrote:

[I]n the course of a preliminary inquiry into [Markopolos' allegations that Madoff's hedge fund profits were the result of fraud], the staff learned that during a recent examination of BLM by NERO's broker-dealer examination staff, Bernard Madoff, the sole owner of BLM, did not fully disclose to the examination staff either the nature of the trading conducted in the hedge fund accounts or the number of such accounts at BLM.

Under "Conclusions Reached", the document reads:

The staff found no evidence of fraud. The staff did find, however, that BLM acted as an investment adviser to certain hedge funds, institutions, and high-net -worth individuals in violation of the registration requirements of the Advisers Act ... As a result of discussions with the staff, BLM registered with the Commission as an investment adviser.

Then, under "Reasons for Closing":

We recommended closing this investigation because ... BLM ... voluntarily remedied the uncovered violations, and because those violations were not so serious as to warrant an enforcement action.

The document is said to have been "prepared by Simona Suh, Staff Attorney, and reviewed and approved by Doria Bachenheimer, Assistant Regional Director and Meaghan Cheung, Branch Chief."

There are two separate questions here:

First, did the SEC stumble by not detecting the fraud that Madoff himself would confess to the following year? It certainly looks that way.

"Were there sufficient red flags for SEC to have caught this?" asked Ross Albert, a partner at Morris, Manning & Martin in Atlanta, and a former SEC senior special counsel. "Absolutely, without a doubt."

"Would a more aggressive team have caught it?," he continued. "Yes."

James Cox, a securities expert at Duke Law School, agreed, calling it "pretty amazing" that the commission failed to detect what appears to have been such large-scale fraud.

But given what SEC did find, was the mild action they took -- merely requiring that Madoff register as an investment advisor -- appropriate?

Albert said that it was. He pointed out that SEC ultimately found only that Madoff did not disclose certain information to examiners, not that he necessarily misled them, as the original inquiry had alleged. And given that the major problem identified was his failure to register as an investment adviser, requiring him to do so was an obvious and appropriate remedy.

Albert identified a less tangible, more philosophical problem as one major factor in the failure to catch Madoff. "Under [commission chair Chris] Cox, SEC had de-emphasized the enforcement program," he said. "Cox worshipped at the same altar of de-regulation that the rest of the Bush administration worshipped at."

That can work OK in good times, he said. But in bad, it can lead to disaster.