The Second Circuit Court of Appeals ruled that Judge Jed Rakoff “abused (his) discretion” when he refused to approve a $285 million settlement between Citigroup, Inc. and the Securities and Exchange Commission, and overturned Rakoff’s ruling.

The case, titled S.E.C. v. Citigroup Global Mkts. Inc., stemmed from a complaint filed against Citigroup by the SEC in October 2011. In the complaint, the SEC alleged that Citigroup “negligently misrepresented its role and economic interest in structuring and marketing $1 billion fund, known as the Class V Funding III.”

The complaint alleged that Citigroup “exercised significant influence” over the selection of $500 million of the fund’s assets, “which were primarily collateralized by the subprime securities tied to the already faltering U.S. housing market.”

The SEC alleged that Citigroup told the fund’s investors that the fund’s investment portfolio was chosen by an independent investment advisor, but that, in reality, Citigroup itself selected a substantial amount of negatively projected mortgage-backed assets in which Citigroup had taken a short position.

“By assuming a short position, Citigroup realized profits of roughly $160 million from the poor performance of its chosen assets, while fund investors suffered millions of dollars in losses,” the SEC complaint said.

Shortly after filing the complaint, the SEC and Citigroup agreed to a consent judgment, which would have required Citigroup to repay the $160 million in net profits “gained as a result of the conduct alleged in the complaint.” The settlement would have also required Citigroup to pay a civil penalty of $95 million and prejudgment interest of $30 million.

Absent from the settlement was an admission of guilt or liability from Citigroup.

Rakoff denied the settlement, writing in his opinion:

“When a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, 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 that the settlement was “neither reasonable, nor fair, nor adequate, nor in the public interest” and set a court date to hear the case.

The SEC and Citigroup both filed appeals, which eventually led to the 2nd Circuit overturning Rakoff’s ruling on Wednesday.

In that ruling, the three-judge panel wrote, “We now hold that the district court abused its discretion by applying an incorrect legal standard in assessing the consent decree and setting a date for trial.”

The appellate court also wrote, “There is no basis in the law for the district court to require an admission of liability as a condition for approving a settlement between parties.”

The ruling also said that Rakoff likely “had a sufficient record before (him) on which to determine if the proposed decree was fair and reasonable.”

The SEC said it was pleased with the ruling. "We are pleased with today’s ruling by the Second Circuit Court of Appeals reaffirming the significant deference accorded to the SEC in determining whether to settle with parties and on what terms,” said Andrew Ceresney, director, SEC division of enforcement. 

“While the SEC has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest by returning money to harmed investors more quickly, without the uncertainty and delay from litigation and without the need to expend additional agency resources."

The full text of the 2nd Circuit’s ruling can be read here.