from www.cnbc.com – A former regional supervisor at the Securities and Exchange Commission missed an alleged $550 million Ponzi scheme that was unfolding at the same time he was caught accessing pornography on his office computer, according to a report obtained by CNBC.

While the report does not suggest the supervisor missed the scam as a result of his pornography use, the report again spotlights embarrassing revelations of conduct by some staffers at the SEC, which is still trying to recover from its missteps in the Bernard Madoff scandal.

The supervisor, whose name is not being released by the SEC, has since resigned the agency.

SEC Inspector General H. David Kotz [pictured] found in a report issued in 2009 that during one week alone in 2008, the supervisor tried 196 times to access internet porn sites on his SEC computer, and that the computer’s hard drive contained numerous pornographic images.

The supervisor “admitted that he had frequently viewed pornography at work on his SEC computer for about a year,” according to a summary of Kotz’s findings.

The new report, obtained by CNBC under the Freedom of Information Act, says the same supervisor led a 2005 examination of Westridge Capital, “missing a significant opportunity” to uncover fraud at the company.

Westridge’s chief operating officer, Paul Greenwood, eventually pleaded guilty to six criminal counts including fraud, conspiracy and money laundering. The firm’s CEO, Stephen Walsh, has denied wrongdoing.

The alleged fraud was not uncovered until early 2009, when the office conducted a new examination in the wake of the Madoff scandal in late 2008.

Kotz began investigating the supervisor’s conduct in the Westridge case after an anonymous complaint alleged that “a hostile work environment existed in the Regional Office” because of “management’s failure to aggressively discipline the senior official” over the porn issue.

The complaint also alleges the supervisor instructed examiners in 2009 not to pursue certain “red flags” that would have exposed his failings in the 2005 examination.

The report finds no specific evidence that the supervisor “instructed or bullied” employees to cover for him, but does find the employees were uncomfortable with his involvement in the 2009 examination and suggests he should have recused himself.

Sections of the report that appear to address the pornography issue are redacted in the copy furnished to CNBC, the SEC citing privacy issues. The report says the allegations of a hostile work environment have been referred to the SEC’s office of Equal Employment Opportunity.

In a separate report last year, Kotz found more than 30 SEC employees or contractors had viewed pornography using government computers on official time. All were disciplined, and the agency has since taken steps to prevent the activity, Kotz found.

In the Westridge case, the SEC alleged in February 2009, that Greenwood and Walsh had skimmed as much as $554 million in customer funds. According to Kotz’s report, the Los Angeles Regional Office had examined the firm in 2005, but “missed a significant opportunity to uncover the Ponzi scheme and failed to conduct a competent and thorough examination of the investment advisor.”

Kotz found that while investigators “became aware of obvious red flags,” they “failed to follow up.”

The alleged red flags included the fact that the firm’s investors became limited partners in Westridge’s broker-dealer, WG Trading, and that Westridge itself had an inexperienced compliance officer and did not conduct compliance seminars. The team also found discrepancies involving who had custody of customer funds.

The Madoff scandal changed everything, according to the report, causing examiners to look at alleged Ponzi schemes in a different light and with improved criteria. “SEC examiners focused more acutely on custody of assets, conducted more joint examinations and were more aggressive in seeking records from unregistered firms,” Kotz notes.

In a statement, SEC spokesman John Nester points to the myriad of post-Madoff reforms at the agency.

“We appreciate the report’s insights, and note its finding that the reforms we’ve implemented in the past two years have made a major difference in the manner in which our examinations are conducted. We believe these steps have significantly improved our ability to detect fraud,” the statement says.