WASHINGTON -- The head of the Securities and Exchange Commission's Miami office failed to properly enforce securities laws in the agency's investigation of investment bank Bear Stearns' valuation of complex securities, the agency's watchdog said in a report made public Friday.

The SEC inspector general found that the SEC's Miami office, run by David Nelson, should have brought a case against Bear Stearns and another company rather than closing the inquiry in the summer of 2007 without enforcement action.

Members of the SEC staff ''expressed surprise that the case had been closed, and no plausible reasons for its closing were provided'' by managers in the Miami office, the report says.

The SEC's enforcement staff disputed the report's findings.

In 2005, the Miami office planned to recommend civil action against Bear Stearns in connection with its pricing of about $63 million in collateralized debt obligations it sold to W. Holding Co. No enforcement action was ultimately taken against them.

Collateralized debt obligations, or CDOs, are complex financial instruments that combine various slices of debt.

According to the report, Bear Stearns' attorney testified that the SEC official in charge of the Miami office, Nelson, told him in a phone call in August 2007 the firm wouldn't be charged, that he could tell the firm ''that Christmas is coming early'' this year and ``Bear Stearns can keep their money.''

The SEC, in a statement Friday, cited the Miami staff's memo explaining the decision to close the investigation. It said the ''matter is inappropriate for further enforcement action'' in part because ``we do not believe there is a sufficiently compelling case against Bear Stearns.''

''While there is evidence of potential wrongful conduct, we do not believe it would make a sufficiently compelling case for fraud,'' the staff memo says.

The SEC statement said the decision was approved by numerous officials up the chain of command.

Staff of the division, in a separate statement, also criticized H. David Kotz's report, saying it failed to include ''critical testimony provided by witnesses'' in his investigation that supports the idea that the decision to close the inquiry was valid. The report does not cite ''a single instance of improper communication or undue influence'' on the part of Bear Stearns, the staff said.

Kotz's report makes a referral to the SEC for a review for possible disciplinary action against Nelson.

The SEC said in its statement that all federal employees have the right to due process in addressing complaints against them.

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