A federal judge challenged a decades-old practice of the Securities and Exchange Commission (SEC) Monday, by rejecting a $285 million settlement between the SEC and Citigroup.

In recent cases involving Wall Street giants such as Bank of America, JPMorgan Chase and UBS, the SEC allowed the companies to settle cases without admitting any wrongdoing. For Citigroup, however, Judge Jed S. Rakoff of the U.S. District Court in Manhattan prevented a settlement in his 15-page ruling.

According to his ruling, the agency’s settlement with Citigroup did not reflect whether it was “fair, reasonable, adequate and in the public interest.” Rakoff, a frequent critic of the SEC, explained the agency “has a duty, inherent in its statutory mission, to see that the truth emerges,” and that the $285 million settlement “is pocket change to any entity as large as Citigroup.”

The SEC disagreed, saying a settlement is often the only feasible option, given the agency’s lack of money or staff to combat Wall Street firms, many of which rarely admit unlawful activity because it can be used against them in investor lawsuits. SEC Director of Enforcement Robert Khuzami said in a statement that the settlement “reasonably reflects the scope of relief that would be obtained after a successful trial.”

The Citigroup case involves the bank allegedly stuffing a $1 billion mortgage fund sold to investors in 2007 with securities likely to fail, in order to profit from its customers when values declined. The SEC claimed Citigroup misled investors and made $160 million from the deal.

Rakoff has directed the SEC to amend the settlement or prepare to begin a trial on July 16, 2012.