A federal court today rejected a proposal $285 million settlement between the Securities Exchange Commission (SEC) and Citigroup Inc. over a 2007 mortgage derivatives transaction. Judge Jed S. Rakoff of the US District Court for the Southern District of New York held that “the SEC’s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.” The court went on to observe that it is hard “to discern from the limited information before the Court what the SEC is getting from this settlement other than a quick headline.” Judge Rakoff ordered the SEC to proceed to trial, consolidating the action against Citigroup with the early action against a Citigroup executive.

The court’s ruling could adversely affect the SEC’s enforcement program, which relies heavily on “without admitting or denying” settlements in order to avoid costly and time intensive litigation. The SEC, already operating under significant financial and personnel constraints, would be hard pressed to try even a majority of the cases it brings. Click here to read the court’s opinion (PDF).