NEW YORK (Reuters)—A U.S. judge on Monday rejected a proposed $285 million settlement between Citigroup Inc. and the top U.S. market regulator over the sale of toxic mortgage debt and ordered a trial.

In a written opinion, Manhattan federal court Judge Jed Rakoff said the proposed settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest."

The rejection was not a surprise, since the judge had made clear at a Nov. 9 hearing that he had major problems with the proposal to settle a major securities fraud case arising from the financial crisis.

A spokeswoman for Citigroup declined to comment, pending a review of the decision. The U.S. Securities and Exchange Commission declined immediate comment.

The SEC accused Citigroup of selling a $1 billion mortgage-linked collateralized debt obligation, Class V Funding III, in 2007 as the housing market was beginning to collapse, and then betting against the transaction.

Judge Rakoff wrote that it was difficult to discern "from the limited information before the court what the SEC is getting from this settlement other than a quick headline."

The settlement would have required the third-largest U.S. bank to give up $160 million of alleged ill-gotten profit, plus $30 million of interest. It also would have imposed a $95 million fine for the bank's alleged negligence, less than one-fifth what Goldman Sachs Group Inc. paid last year in a $550 million SEC settlement over a different CDO.

"If the allegations of the complaint are true, this is a very good deal for Citigroup; and, even if they are untrue, it is a mild and modest cost of doing business," the judge said.

One Citigroup employee, director Brian Stoker, was also charged by the SEC. He is contesting those charges. Judge Rakoff consolidated the two cases and set a trial date of July 16, 2012.

Judge Rakoff wrote that the SEC "has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."

It was not the first time in recent years that Judge Rakoff rejected a proposed SEC settlement with a major bank.

In 2009, he struck down a $33 million settlement with Bank of America Corp. over the takeover of Merrill Lynch & Co., saying it punished shareholders who were victims of the alleged fraud. He later approved a $150 million accord.

The case is SEC vs. Citigroup Global Markets Inc., U.S. District Court, Southern District of New York, No. 11-07387.