The 2nd U.S. Circuit Court of Appeals in Manhattan reversed a decision by Judge Jed S. Rakoff to set a trial date for the case brought by the Securities and Exchange Commission in October 2011.
A three-judge panel said the SEC had demonstrated it would face irreparable harm because the judge refused to reconsider his rejection of the settlement as he set a 2012 trial date.
The settlement between the SEC and Citigroup came after the commission accused the bank of betting against a complex mortgage investment in 2007. It said the company made $160 million while investors lost millions.
In November 2011, Rakoff found the deal inadequate and ordered a prompt trial. He said the settlement was "neither fair, nor reasonable, nor adequate, nor in the public interest ... because it does not provide the court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards." Both the SEC and Citigroup appealed.
Rakoff criticized the deal in part because it did not require Citigroup to admit wrongdoing.
In a decision written by Circuit Judge Rosemary Pooler, the 2nd Circuit said there was no basis in the law for a judge to require an admission of liability before approving a settlement.
And it clarified that a judge must only determine whether the proposed consent decree is fair and reasonable and that the public interest would not be disserved.
In returning the case to Rakoff, the appeals court said he should not infringe on the SEC's discretionary authority to choose its terms of settlement and should not require the agency to establish the truth of the allegations it made against Citigroup.
The appeals panel said Rakoff "with the benefit of copious submissions by the parties, likely had a sufficient record before it on which to determine if the proposed decree was fair and reasonable."
Still, it said he could ask each side to provide additional information so he can ensure there was not improper collusion between the settling parties.
In a statement, SEC Enforcement Director Andrew Ceresney said the agency was pleased.
He said the SEC will continue to seek admissions of wrongdoing in appropriate cases but recognized that reaching settlements without admissions sometimes enable regulatory agencies to return money more quickly to harmed investors.
Dennis Kelleher, president of Better Markets, a Washington-based group that advocates strict financial regulation, applauded the appeals court for citing previous law making clear that judges should not merely "rubber stamp" agreements but ensure they are fair and reasonable.
Kelleher said the group looked forward to Rakoff's analysis in future proceedings of whether there was collusion to reach the deal or an effort to mislead the judge about the scope and terms of the settlement.
A message seeking comment from a Citigroup lawyer was not immediately returned.
AP Business Writer Marcy Gordon in Washington contributed to this report.