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SEC Inspector General David Kotz is investigating why the agency failed to catch on to Bernard Madoff's Ponzi scheme, which sucked up billions of dollars in investors' money for years. Several people warned the SEC that Madoff's returns were too good to be true.

Kotz said the SEC has procedures for paying bounties in place but only in insider-trading cases, Financial Times reported. In a letter to Rep. Paul Kanjorski, D-Pa., head of a house panel working on financial regulation, Kotz also said the criteria for providing rewards are "vague."

In the Madoff case, Harry Markopoulos, a Boston securities executive turned fraud investigator, repeatedly tried to alert the SEC, eventually sending a 21-page memo in 2005 that called him a "fraud."

Kotz said the SEC should pay bounties in all cases where a whistleblower's information leads to a civil penalty.

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