A 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 November 9 hearing that he had major problems with the proposal.

The U.S. Securities and Exchange Commission 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.

One Citigroup employee, director Brian Stoker, was also charged by the SEC. He is contesting those charges.

Representatives of Citigroup and the SEC could not immediately be reached for comment.

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

(Reporting by Grant McCool; Editing by Derek Caney)

Citigroup Settlement