The top U.S. market regulator is appealing a judge's rejection of a major Citigroup Inc civil securities fraud settlement, according to court papers filed on Thursday.

The $285 million pact was rejected by U.S. District Judge Jed Rakoff last month as pocket change for Citigroup. In that ruling, the judge criticized the U.S. Securities and Exchange Commission's policy of settling lawsuits without having defendants admit or deny wrongdoing.

The SEC said in a statement that it believes Rakoff erred by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits.

Such appeals are unusual for the regulator, which is used to hammering out deals with defendants and having them approved by judges.

Rakoff's November 28 ruling threw out a deal over the sale of toxic mortgage debt. The judge wrote at the time that the settlement was neither reasonable, nor fair, nor adequate, nor in the public interest. He set a trial date of July 16, 2012.

The SEC's challenge will be reviewed by the 2nd U.S. Circuit Court of Appeals in New York. That could delay the trial.

Citigroup also disagreed with the judge's ruling. In a statement on Thursday, the bank said it believes the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges.

In its complaint, the SEC had 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.

The SEC said the CDO caused more than $700 million of investor losses. One Citigroup employee, director Brian Stoker, was charged by the SEC, and is contesting those charges.

Rakoff has been a thorn in the side of the SEC. In 2009, he rejected its initial proposed settlement with Bank of America Corp over its takeover of Merrill Lynch & Co.

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 Bernard Orr)

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