The SEC inspector general found that the agency knew since 1997 that R. Allen Stanford was likely operating a Ponzi scheme. But it didn't charge the billionaire until February 2009. The charges came a few months after the massive pyramid scheme of financier Bernard Madoff surfaced.
SEC enforcement officials discouraged cases that couldn't be resolved quickly, the inspector general found.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., asked SEC Enforcement Director Robert Khuzami why no one at the SEC has been fired or demoted for the excessive delay. Other senators on the panel also wanted an answer during the hearing on the issue.
"We seem to have an instance in which one side of the agency was screaming that there was a fire, and the other side said that the fire was too hard to put out," Sen. Dodd said.
Khuzami told the panel that the disciplinary process is under way.
That prompted Sen. Jim Bunning, R-Ky., to say: "It's been 13 years. Isn't that enough of a chance?"
Khuzami responded that the details of the SEC's failure in the case only have been known since the inspector general's report was issued in April.
Khuzami also said the agency has toughened its efforts to shut down financial misconduct since the past failures.
He said the SEC is working to provide "maximum recovery" to investors hurt in Stanford's alleged $7 billion fraud.
Inspector General David Kotz also found that the former head of enforcement in the SEC's Fort Worth, Texas office, who helped quash investigations of Stanford, later represented the billionaire as a private lawyer. Kotz indicated at the hearing that he has referred the matter to the Justice Department for possible criminal prosecution in connection with statements he made to SEC ethics officers.
Kotz also said the official's representing Stanford appeared to violate Texas's rules for lawyers.
The official briefly represented Stanford in 2006 before being told by the SEC ethics office that it was improper for him to do so, Kotz testified.
Kotz said the reforms in the SEC's enforcement and inspections operations that Khuzami outlined may not have yet taken hold at the lower levels of the agency.
"I think that the intention is there," he said. "I think it takes time for a culture to be changed."
Stanford has been in federal prison since his indictment in June 2009 on criminal charges that his international banking business was really a pyramid scheme. He is disputing the charges. He faces a life sentence if convicted.
Kotz's office has also found that the agency bungled five investigations into Madoff's business between June 1992 and December 2008. Madoff's fraud, which could be the biggest Ponzi scheme in history, destroyed thousands of people's life savings, wrecked charities and jolted investor confidence during the worst days of the financial crisis.