A lot of people are applauding federal district Judge Jed Rakoff for his principled rejection of the $285 million settlement between Citigroup and the SEC.

Rakoff called the deal "neither fair, nor reasonable, nor adequate, nor in the public interest." Many people will no doubt agree with the decision. If Citigroup misled investors--and it is important to note that Citigroup has not admitted guilt in the matter--as the SEC suggests it did in its suit, the bank committed heinous acts that would be worse even than the acts allegedly committed by Goldman Sachs, which settled for a record $550 million.

In addition, it's easy to understand the judge's frustration with big banks refusing to admit that they did anything wrong, an obvious attempt to head off private litigation. And yes, the SEC enforcement effort has struck some critics as effete.  But while the judge had compelling reasons for his decision, what he did not offer was an effective solution. He may be just a tad too principled.

He wrote that, "It is harder to discern from the limited information before the Court what the SEC is getting from this settlement other than a quick headline."

The reality is that the headline is the payoff for the SEC. It cannot hope to police the industry in a comprehensive action. It simply does not have the resources. Nor does it have the resources to take many companies to trial and expect to win. If it went to trial, it might win. But if all targets ended up going to trial, resources would be drained and enforcement action would dwindle.

Sadly, the most  it can do is rack up symbolic victories. To change this reality would require massive investment and structural change, none of which is in the offing. So while Rakoff is right, we need solutions as well as righteous anger. My sense is that he understands this. He'll likely approve a modified settlement. At least he will have had his say.

For more:
- here's a Washington Post article on the news
- here are some excerpts from the ruling from Reuters.

Related articles:
Judge critical of SEC settlements   
Judge already skeptical of SEC-Citi settlement