A federal judge Wednesday challenged the SEC’s plan to settle a fraud case against Citigroup for $285 million, saying that the deal would recoup only a fraction of investors’ losses and would leave the firm free to proclaim its innocence in private lawsuits over the remaining damages.

The judge used the Citigroup case to mock the SEC’s traditional way of doing business — allowing defendants to settle without admitting or denying wrongdoing.

The unproven allegations, U.S. District Court Judge Jed S. Rakoff said, “are no better than rumor or gossip.”

“Does not the SEC of all agencies have an interest in establishing what the truth is?” Rakoff asked.

It was the third case since the financial meltdown of 2008 in which Rakoff sharply questioned the value of enforcement actions brought by the Securities and Exchange Commission, which is responsible for policing Wall Street and protecting investors.

Citigroup is accused of misleading investors about a 2007 transaction tied to the deteriorating housing market in which the firm bet against its customers and made profits of $160 million while the customers lost more than $700 million.

At a time when protesters are occupying Wall Street and members of the public are calling for financial executives to be held accountable for the crisis their firms helped precipitate, Rakoff has argued that the SEC makes troubling compromises.

The SEC has countered that settling its civil suits without any admission of wrongdoing brings misconduct to light, conserves agency resources and enables the SEC staff to pursue other investigations. It allows the agency to repay victims some of their damages sooner rather than later, and it avoids the need for the regulators to actually win a case in court.

In a case involving State Street, two former employees of the firm fought the SEC and recently beat the agency in an administrative trial.

Rakoff’s grilling of the agency Wednesday extended to other standard SEC practices.

SEC settlements routinely include court orders prohibiting defendants from committing similar violations in the future and exposing them to potentially severe consequences if they do. However, the agency has refrained from enforcing those injunctions against repeat offenders.

Citigroup was subject to two injunctions that predated the current case, SEC chief litigation counsel Matthew T. Martens said.

Rakoff suggested that the injunctions are “just for show.”

The SEC lawyer said the agency takes past offenses into account when determining an appropriate penalty. Other SEC officials said after the hearing that past injunctions can be enforced only when the SEC catches a defendant in an ongoing violation.

The proposed settlement also calls for Citigroup to take remedial steps to reduce the risk of future violations; Rakoff asked if those were merely “window dressing.”

Getting a judge to approve SEC’s settlements was often a formality, but Wednesday’s hearing brought a slew of top SEC brass to the federal courtroom in Manhattan.

The SEC has alleged that Citigroup Global Markets, a subsidiary of the bank, misled investors about a complex investment tied to subprime mortgages. In early 2007, as the housing bubble was beginning to implode, Citigroup marketed an instrument known as a collateralized debt obligation and allegedly led investors to believe that an independent third party had chosen the assets from which the CDO was built.

In fact, the SEC says, Citigroup helped choose the assets and used the CDO to bet successfully against investors in the instrument.

The proposed settlement calls for Citigroup to give up its $160 million in profits with $30 million of interest. The firm, which reported a profit of $3.8 billion in the third quarter, also would have to pay a $95 million fine.

No senior executives were named in the case, but one employee of the firm was, and he is fighting the charges.

In court Wednesday, Martens said that the SEC doesn’t believe its case leaves the public wondering about Citigroup’s guilt.

Rakoff turned to a lawyer for Citigroup.

“We do not admit the allegations,” attorney Brad S. Karp said.

“There you are,” Rakoff said to Martens.

“But if it’s any consolation,” Karp added, “we don’t deny them.”

The standard neither-admits-nor-denies clause means the SEC settlement could not be used as proof of guilt by investors suing Citigroup on their own. Citigroup could assert its innocence in those disputes, Rakoff said.

“So why do you want to require the private parties to have to re-prove what you believe you can already prove?” Rakoff said. “[W]hy does it make any sense?”

The judge also expressed skepticism about the SEC’s decision to charge Citigroup Global Markets with negligent rather than intentional fraud.

The SEC argued that the judge is entitled to assess whether the proposed settlement is fair, adequate and reasonable, but not whether it is in the public interest.

Rakoff said he was perplexed by that assertion, but he conceded that he must give the SEC significant deference.

It is unclear whether judges can do much more than criticize and cajole.

In a different post-crisis case against Citigroup, another federal judge, Ellen Segal Huvelle, ultimately approved a $75 million settlement but complained that the penalty was too small to serve as a deterrent. In that case, the SEC alleged that Citigroup misled investors about the extent of its own exposure to subprime mortgages.

And, in a third post-meltdown case, Rakoff pushed the SEC to renegotiate a $33 million settlement with Bank of America, but he approved the eventual $150 million pact even as he protested that it was “half-baked justice at best.”

Rakoff declined to rule from the bench Wednesday, saying he would issue a written ruling.

Staff researcher Lucy Shackelford contributed to this report.