Judge Jed Rakoff's refusal to accept a settlement between Citigroup and the U.S. Securities and Exchange Commission is most significant not as a rebuke of Citigroup but as a resounding statement of frustration with the Securities and Exchange Commission's ineffectiveness.

This was not the first time the financial watchdog was criticized for its toothlessness, but Rakoff's scathing opinion distils a sense of outrage that the SEC's lack of meaningful enforcement mechanisms means wayward financial institutions have been able to break the law again and again without suffering more than a hefty fine.

Did Settlement Serve the Public Interest?

By accepting a $285 million settlement, Citigroup would have been absolved of admitting wrongdoing for misleading investors about a toxic billion-dollar fund that Citigroup was actively betting against. In his opinion, Rakoff asserts that the SEC was failing its duty to uphold the public interest, both by charging Citigroup with negligence rather than with fraud and by allowing the financial firm to close the case without admitting or denying the allegations.

The court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance, Rakoff wrote.

Rakoff also took aim at how such settlements are useless to deter future wrongdoing. When they settle fraud cases brought by the SEC, financial firms also are slapped with injunctions mandating they will never commit such a crime again. But that promise is brazenly flaunted, a glaring example of SEC impotence that Rakoff addressed in labeling Citigroup a recidivist.

Part of the problem is the well-established coziness between SEC employees and the financiers they are tasked with policing. The number of people who leap between the SEC and firms appearing before the enforcement agency is staggering, and Rakoff underscored the relaxed nature of the relationship between the two by noting that settlements are frequently viewed, particularly in the business community, as a cost of doing business imposed by having to maintain a working relationship with the regulatory agency.

Another Court Goal: Insight

But more than that, Rakoff was trying to ensure that the details of Citigroup's alleged fraud do not recede into obscurity, at which point Citigroup would be shielded from those seeking not only recompense but knowledge. It is a similar sentiment that has led some attorneys general to oppose a settlement, pushed aggressively by the Obama administration, that would protect banks from liability for the fraud pervading their unscrupulous foreclosure practices.

As Rolling Stone's Matt Taibbi reported, the SEC obliterated the evidence of wrongdoing produced by thousands of preliminary investigations. The Citigroup settlement is a different case, but Rakoff was still reacting to what he saw as a potential whitewash.

In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth, Rakoff wrote in his conclusion.

The SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges, he continued. and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivance.