(Bloomberg News) The U.S. Securities and Exchange Commission appealed a federal judge's decision to reject its proposed $285 million settlement with Citigroup Inc.

The appeal, filed yesterday in the U.S. Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff's rejection last month of the settlement, which involved claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages.

"We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits," SEC Enforcement Director Robert Khuzami said today in a statement.

Rakoff criticized the agency's practice of resolving cases without requiring the subject of the allegations to admit wrongdoing. In his ruling, Rakoff said the settlement didn't provide him with "any proven or admitted facts" to inform his judgment.

Khuzami said the judge's decision "is at odds with decades of court decisions that have upheld similar settlements.". Rakoff's approach "could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors," he said in the statement.

'Twin Risks'

The SEC said a settlement such as the one struck with Citigroup "puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount -- risks that always exist no matter how strong the evidence."

Khuzami said that the accord was based on a careful review of the risks and benefits and said that settling without any admission serves investors. Other frauds might never be investigated because the government's limited resources will be tied up in unresolved litigation, he said.

He said that the SEC is "fully prepared" to refuse to settle and proceed to trial when proposed settlements fail to achieve the right outcome. The agency said that it doesn't settle in 70 percent of the civil actions against individuals and doesn't reach agreements with 42 percent of entities sued by agency.

In lawsuits such as the one against Citigroup, the law doesn't entitle the SEC to recover the amount lost by investors and instead only allows a monetary penalty up to the amount of a defendant's ill-gotten gain, Khuzami said.

'Factual' Defense

Danielle Romero-Apsilos, a Citigroup spokeswoman, said the New York-based bank disagrees with the court's rejection of the settlement. The agreement "fully complies with long-established legal standards," she said.