(Recasts first paragraph, adds comments, detail on probe)

By Joe Rauch and Rachelle Younglai

WASHINGTON(Reuters) - The timing of the
Securities and Exchange Commission's case against Goldman Sachs
Group Inc is "suspicious," a federal watchdog said
Wednesday, raising the specter that the SEC was trying to
downplay a damning report about its Allen Stanford probe.

The SEC filed civil fraud charges against Goldman in
mid-April, the same day it released a watchdog report that
accused the regulator of mishandling its investigation of Allen
Stanford's alleged $7 billion Ponzi scheme.

The report authored by SEC Inspector General David Kotz
said the regulator had suspected as early as 1997 that Stanford
was running a Ponzi scheme but did nothing to stop it until
late 2005.

The timing "strains credulity," Kotz told a congressional
hearing examining how the SEC handled the Stanford
investigation.

Kotz's report went largely unnoticed, angering lawmakers
and some victims who lost their investments from the alleged
Ponzi scheme that Stanford perpetrated.

Stanford is in a Texas jail awaiting trial on 21 criminal
charges related to what is now alleged to have been a $7
billion scheme involving the issuance by his Antiguan bank of
CDs with improbably high interest rates.

Other Republican lawmakers accused the SEC of filing the
Goldman case to help Democrats pass the landmark Wall Street
reform bill, which was winding its way through Congress in
April.

Kotz is probing whether the SEC was politically motivated
to file the Goldman case -- a charge the SEC vehemently denies.
Kotz said he expects to complete his Goldman report by the end
of next week.

At the Senate Banking Committee hearing, the top
Republican, Richard Shelby, said the Stanford case represents a
"major failure" by the SEC. Shelby also suggested the timing
was suspect and seemed intended to draw the least amount of
scrutiny.

The SEC filed charges against Stanford in February 2009,
accusing the Texas financier and three of his companies of
selling billions of dollars of fraudulent certificates of
deposit.

The SEC, still recovering from missing Bernard Madoff's $65
billion Ponzi scheme, is under pressure to root out fraud after
the U.S. housing collapse and Wall Street's ensuing meltdown.

The Goldman suit, the SEC's highest-profile case stemming
from the financial crisis, has put Wall Street on notice that
no one is off limits.

SEC REGRETS

The SEC's enforcement director Robert Khuzami and other SEC
officials apologized at the hearing and said they had deep
regrets that the regulator failed to act more quickly to limit
the tragic investor losses suffered by Stanford victims.

But apologies did little to assuage Stanford victims, who
traveled to Washington to attend the hearing and snickered as
the regulators testified.

"I feel that the SEC did a good job of covering their own
tails. I think they were part of the problem in this whole
thing," said 67-year old Richard Muzyka, of Fort Myers Beach,
Florida. Muzyka is a retiree who initially invested with
Stanford because of the company's stable returns, which he saw
as attractive for living on a fixed retirement income.

Kotz's report found the SEC's Fort Worth, Texas, office
examined Stanford in 1997, 1998, 2002 and 2004, "concluding in
each case that Stanford's CDs were likely a Ponzi scheme or a
similar fraudulent scheme."

In 2005, the enforcement arm of the SEC finally agreed to
seek a formal order from the commission to investigate
Stanford. But Kotz said it failed to conduct due diligence on
Stanford's investment portfolio, missing an opportunity to
bring action against Stanford Group Co.

Kotz said he was talking to criminal authorities about the
former head of enforcement in Fort Worth, Spencer Barasch, who
"played a significant role" in quashing investigations of
Stanford and sought to represent him on three occasions after
he left the SEC.

According the report, Barasch briefly represented Stanford
in 2006 before being informed by the SEC ethics office that it
was improper to do so. When asked why he was so insistent on
representing Stanford, Barasch replied: "Every lawyer in Texas
and beyond is going to get rich over this case. Okay? And I
hated being on the sidelines," according to Kotz's report.

Republican Senator Jim Bunning said he "almost fell off his
chair" when he read that and asked Kotz whether that looked
like criminal negligence.

Kotz only said he was talking to criminal authorities and
would not elaborate further.

The SEC has said that most of Kotz's seven recommendations
have been implemented and that it would carefully analyze the
report and implement any additional reforms as necessary for
effective investor protection.

Kotz's report says that, even after SEC examiners
identified multiple violations of securities laws by Stanford
in 2002, the SEC's enforcement division did not open an
investigation.

Kotz has said senior officials in the Fort Worth office
perceived they were being judged by the number of cases they
brought.

"Novel or complex cases were disfavored," he concluded. "As
a result, cases like Stanford, which were not considered
'quick-hit' or 'slam-dunk' cases, were not encouraged."
(Reporting by Joe Rauch and Rachelle Younglai; editing by
Gerald E. McCormick and Andre Grenon)