It was a relationship rife with potential conflicts, and, from day one, everyone involved recognized that.

When Bernard Madoff’s $60 billion Ponzi scheme came to light in December 2008, critics immediately seized on marriage of his niece, Shana Madoff, a compliance officer at his firm, and Eric Swanson, who had been assistant director of compliance at the Securities and Exchange Commission. How, critics asked, could the SEC effectively regulate a firm when parties on both sides were in a relationship?

In fact, according to dozens of e-mails released by David Kotz, the SEC’s inspector general, the agency itself was aware of the potential conflicts, and the internal drama prompted Swanson to join the private sector rather than break off the relationship.

In the end, Kotz determined that Swanson’s relationship didn’t influence the conduct of any examinations by the SEC into Bernard Madoff. Yet, the emails released paint the picture of a romance that was impossible to keep hidden, and a human drama that threatened both friendships and careers.

Swanson and Shana Madoff had a frequent correspondence as far back as 2003, when Shana’s father Peter was on the receiving end of several regulatory requests signed by Swanson. In 2004, Shana helped organize a conference for the Securities Industry Association, and Swanson had been asked to participate.

During that back and forth, Swanson needed advice. He was putting together a separate presentation for the National Association of Securities Dealers on how compliance officers, like Shana, tend to cling to “best practices” as an industry, even when those best practices fall short – thus creating situations like the mutual fund market-timing scandal of 2004. Back then, it was clear that Swanson himself could never imagine a scandal brimming at Madoff.

“The question is, and acknowledging that Madoff is the exception to the above, do you think this theory is plausible?” he wrote.

By spring of 2006, the relationship had somehow taken a more personal turn. The first instance came in an email exchange after a night out with Shana Madoff, Swanson and Alex Sadowski, who was the branch chief of the SEC’s inspection division. By all accounts, it was a fun night.

Just before 10 a.m. on Saturday, March 4, 2006, Swanson emailed Sadowski, asking, “How are we feeling today?”

“Whoo boy,” Sadowski replied. And then, in a dig at his friend, he added, “Shana madoff just leave?”

Swanson either didn’t choose to kiss and tell, or was a gentleman.

“Nice,” he wrote back. “I understand why you wouldn’t remember, but let me refresh your brain – she left on her own well before we did.

“There was an option – I took a pass.”

He did, however, admit to getting criticism that he was a ‘sycophant’ when it came to Madoff.

But, despite taking the pass, something did develop between Swanson and Peter Madoff over the next month, and it threatened Swanson’s career.

Swanson informed John McCarthy, associate director in the office of compliance inspections and examinations, of the relationship, and McCarthy was not happy. In an email to Shana, Swanson wrote: “So, I was wrong. It took a couple of days but John’s upset. Very.”

Swanson and Shana Madoff went underground for two weeks, but McCarthy again found out. McCarthy sent Sadowski and email, referring to Swanson by the nickname “hip hop.”

“I think madoff and hip hop had another rendez vous,” McCarthy wrote. “U keeping secrets from me? Am I’m full disclosure with you. Oh brother.”

Sadowski forwarded that message to Swanson, adding, “U really need to tell john.”

McCarthy and Swanson had already spoken, though. And it wasn’t good.

“He sent me basically the same message an hour earlier last night,” Swanson told Sadowski. “He tricked me into thinking someone had told him something and I came clean (no details – just that I saw her in ny). He went nuts. He came over abt 10 and we had a really bad night.

“Bottom line, I need to cut it off or lose my relationship with John, which I may have done already. I need to talk to you when you have 5 minutes.”

In the end, Swanson chose Madoff. That year, he left the SEC to become chief counsel at financial-services firm Ameriprise. By December of that year, on Shana’s birthday, he proposed marriage.