Judge Jed Rakoff delivered a final blow to the enforcement paradigm followed by the Securities and Exchange Commission today by rejecting their $285 million settlement with Citigroup on an illegal mortgage backed securities deal, calling it “neither fair, nor reasonable, nor in the public interest.”

In an order Monday, U.S. District Judge Jed S. Rakoff rejected the pact, saying in part that he “lacks a framework for determining” the adequacy of the deal based on the facts presented to the court.

“The SEC’s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact,” the judge said.

As you can see, Rakoff is not only rejecting this deal, but objecting to the entire premise of SEC settlements on these issues over the past several years, particularly the idea that the offending party need not admit to wrongdoing when they settle. There may not be a more galling aspect to the general amnesty given to the financial industry than this, that the big banks can just throw money at their problems, just pay off the regulators for their fraudulent activities, and never have to say “we were wrong.” Obviously an admission of guilt would open them up for additional charges, and that simply cannot be done.

Zero Hedge has the full filing. This triggers a trial date for Citi in July of 2012, a jury trial where the ultimate terms of the settlement can change wildly. The SEC obviously gets reprimanded by Rakoff for failing to create a settlement in the public interest. But Citi could have to pay through the nose by going to a jury on this case, where they are accused of knowingly selling MBS to investors where they took the other side of the bet.

More from Crain’s New York. Bravo for Judge Rakoff for blowing the whistle on an insidious game being played between the regulators and the banks to essentially whitewash past crimes. This is a great line, from the order:

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. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.