A federal judge has rejected a $285 million settlement between Citigroup (C) and the Securities and Exchange Commission related to soured mortgage-backed securities, saying the pact fails to address the “public interest.”

U.S. District Judge Jed Rakoff issued a ruling Monday in which he criticized the settlement because it provided no “framework” for determining whether the penalty adequately addressed the allegations.

In addition, the judge took a dim view of the agreement because, like many civil settlements with the SEC, it allowed the defendant to pay a fine without admitting to any wrongdoing.

“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 judge said.

The SEC issued a lengthy statement Monday afternoon in response to Rakoff's criticism.

“While we respect the court’s ruling, we believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial," said Robert Khuzami, director of the SEC’s Division of Enforcement.

Khuzami defended SEC settlements that don't include admissions of guilt, saying the penalties and reforms required in such settlements make it worth it.

"Refusing an otherwise advantageous settlement solely because of the absence of an admission also would divert resources away from the investigation of other frauds and the recovery of losses suffered by other investors not before the court," Khuzami said.

Citigroup released a response late Monday: "We respectfully disagree with the Court's ruling.  We believe the proposed settlement is a fair and reasonable resolution to the SEC's allegation of negligence, which relates to a five-year-old transaction. We also believe the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges."  

Rakoff set a trial date for July to hear the case, which he consolidated with a related suit against a former Citigroup employee.

Citigroup and the SEC can rework the settlement before trial, but it must be approved by Rakoff.

Citigroup was sued by the SEC earlier this year for allegedly misleading investors in a complex investment product comprised of mortgage-backed securities that eventually soured. The SEC charged that Citigroup failed to tell those investors that the bank stood to make a profit if the security eventually lost value.

Rakoff’s ruling spared neither Citigroup nor the SEC. For Citigroup and other banks, these types of settlements are often viewed “as the cost of doing business” rather than a means for determining the truth, he said. And he questioned what the SEC got in return for the pact “other than a quick headline.”

Citigroup's shares were up $1.39 or 5.88 % at $25.02 in midday trading amid a broad stock market rally.

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