By Evelyn Leopold UNITED NATIONS (Reuters) - A probe into the U.N. oil-for-food program for Iraq (news - web sites) said the director of the operation got oil allocations for a firm run by a friend, and U.N. Secretary-General Kofi Annan (news - web sites) vowed to discipline him. Benon Sevan, who ran the humanitarian program, was accused in a report from Paul Volcker, the former head of the U.S. Federal Reserve (news - web sites), of soliciting and getting the allocations for a trading firm connected to the family of former Secretary-General Boutros Boutros-Ghali. A second official, Joseph Stephanides, now director of Security Council affairs, was alleged to have intervened in selecting large contractors for the program he helped organize in 1996, before Sevan took over in late 1997. Annan said he too would be disciplined and that if criminal acts were committed, diplomatic immunity would be lifted. The oil-for-food program, which began in December 1996 and ended in November 2003, allowed Saddam Hussein (news - web sites)'s government to sell oil in order to buy humanitarian goods. It was intended to ease the life of ordinary Iraqis under 1990 U.N. sanctions. The fraud allegations have cast a shadow over the world body and Annan himself, who chose Volcker to lead an independent investigation. "I think it is a fact that Mr. Sevan placed himself in a grave and continuing conflict of interest situation that violated explicit U.N. rules and violated the standards of integrity essential to a high-level international civil servant," Volcker told a news conference. Sevan, a Cypriot, issued his own statement. "Mr Sevan never took a penny," his lawyer Eric Lewis said. "Unfortunately, in the current political climate, the Independent Inquiry Committee needs to find someone to blame." But Annan, who took over the top U.N. post from Boutros-Ghali in January 1997, said in a statement the report contained "extremely troubling evidence of wrongdoing" by Sevan, who has retired from the United Nations (news - web sites) but gets a token salary because of the inquiry. 'THE SECRETARY-GENERAL IS SHOCKED' "The secretary-general is shocked by what the report has to say about Mr. Sevan," Annan's chief of staff, Mark Malloch Brown, told a news conference. "He very much doubts there can be any extenuating circumstances to explain the behavior, which appears proven in the report." But he noted, "we got a thumbs up" on administration of the program and Iraq should be encouraged that the funds were used as intended. Volcker said few institutions had subjected themselves to such "intensity of scrutiny." The report also cited "convincing and uncontested evidence" that three firms: Banque Nationale de Paris; the Dutch Saybolt Eastern Hemisphere and Britain's Lloyd's Register Inspection were awarded contracts without competitive bidding in 1996. But Volcker said in the interim report -- the final one will be in June -- the most serious violations of the U.N. sanctions involved illegal oil sales outside oil-for-food. "And there is no question that those sales were known by the U.N. Security Council," which included the United States. A CIA (news - web sites) investigation in September found Saddam earned $1.7 billion via kickbacks on goods and oil under the program. He got an additional $8 billion in oil sales to Jordan, Turkey and Syria, which were known to the council. Volcker said he was concentrating on wrongdoing by U.N. officials. Specifically, the report said Sevan had convinced Iraq to sell oil allocations to African Middle East Petroleum company, an obscure trading firm registered in Panama with offices in Switzerland and Monaco. The company is headed by Egyptian Fahkry Abdelnour, a cousin of Boutros-Ghali. The deal was also helped along by Fred Nadler, the former secretary-general's brother-in-law, the report said. He also questioned Sevan's assertion that an aunt in Cyprus, now deceased, had given him some $160,000 over several years. The trading firm, according to Iraqi records, netted a profit of $1.7 million, the report said. Volcker said allegations of conflict of interest by Annan would be handled in a later report. Annan's son Kojo once worked in West Africa for a Swiss firm Cotecna, under contract to the United Nations in Iraq. Annan has said he had no hand in assigning contracts and his son says he had left the company when the deal was made.