If the case went to trial, she said, "we would present substantial factual and legal defenses to the charges."

The SEC, in a filing today, notified Rakoff it would appeal his ruling.

In an earlier case, Rakoff criticized the SEC's practice of allowing financial institutions to settle enforcement actions without admitting or denying the agency's allegations. In 2009, Rakoff, a former federal prosecutor and civil litigator, rejected a $33 million agreement between the SEC and Bank of America Corp.

Ex-Director's Case

In his Citigroup ruling, Rakoff consolidated the SEC's case against the bank with its lawsuit against Brian Stoker, former director of the company's CDO structuring group. Stoker was responsible for structuring and marketing the investment, according to an SEC complaint filed last month.

The judge noted that, in its complaint against Stoker, the SEC claimed Citigroup knowingly withheld information from investors that it intended the fund to include poorly rated assets, an allegation missing from the agency's complaint against the bank.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-07387, U.S. District Court, Southern District of New York (Manhattan).

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