I guess what I am really asking is did the SEC not spot this because it was not their job or because it was their job and they didn't do their job properly?
It is probably considered their job but I don't have any confidence in the SEC to proactively investigate anything of real substance. However they did not even have to spot it since Mr. Markopolos turned up with a ton of evidence that it was a Ponzi scheme. They did not even do basic things like verify that he was actually trading.
But in this case shouldn't the regulator assume some liability?
The courts in the US have long upheld that law enforcement (and probably by extension, regulators) are under no obligation to protect you.