Illustration by Jason Seiler.

It is not hard to imagine what the reaction was like around the Securities and Exchange Commission offices when it was discovered that U.S. District Court Judge Jed Rakoff would be tasked with approving the agency’s settlement agreement with Citigroup over mortgage-backed securities fraud.

It was Judge Rakoff, after all, who took the unusual step in 2009 of blocking a settlement between the SEC and Bank of America over executive bonuses, writing in a scathing ruling that “all this is done at the expense, not only of the shareholders, but also of the truth” and adding that “it does not comport with the most elementary notions of justice and morality.”

It was Judge Rakoff who in 2010 called off a JP Morgan deal with a cable television operator, accusing the bank of violating, “at a minimum, the covenant of good faith and fair dealing,” and writing that the structure of the deal was “an end run, if not a downright shame.”

And it was Judge Rakoff who earlier this year decried the SEC’s “cavalier approach” to “forum shopping” when he rejected the agency’s motion to dismiss a lawsuit by Galleon Group managing director Rajat Gupta—after he was singled out among 29 other defendants to face an administrative hearing rather than a full trial.

(“A funny thing happened on the way to this forum,” the judge wrote, showcasing his trademark penchant for wordplay in opinion writing, lines now being quoted by his admirers as if they belonged in Bartlett’s. “The Securities and Exchange Commission—having previously filed all of its Galleon-related insider trading actions in this federal district—decided it preferred its home turf.”)

“[SEC chairwoman] Mary Schapiro must have been pulling her hair out of her head when she saw the case was going to Judge Rakoff. It was her worst nightmare,” said Christopher Bebel, a former counsel to the SEC’s enforcement division. “Judge Rakoff is clearly a guy on a mission to use his authority to bring a greater sense of integrity to the securities industries as a whole.”

But whether or not one judge—albeit over the course of several rulings—has the power to change the regulation of the financial sector, particularly enforcement by the SEC, is in dispute.

Ever since the Bank of America case, Judge Rakoff has been hailed as a dragon-slayer by Americans looking to hold someone on Wall Street accountable for the great crash of 2008. Last year, the Huffington Post suggested him for the Supreme Court; the Los Angeles Times described him as a one of the few figures in the country willing to “tap into the nation’s outrage.” Reuters blogger Felix Salmon wrote that “this crisis has thrown up very few heroes; Rakoff is one of them.”

“It wasn’t hard to see this coming,” said former New York governor Eliot Spitzer, who counts himself as one of Judge Rakoff’s admirers.

In October, Judge Rakoff handed out 18 questions to lawyers from the SEC and Citigroup, asking in an order, “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud, but the defendant neither admits nor denies wrongdoing?”

And sure enough, last week, he found the consent judgment entered into between the agency and the bank to be “pocket change to any entity as large as Citigroup,” The settlement, which relied, as they often do, on the bank admitting neither guilt nor innocence to protect it from future civil lawsuits, had rendered the court a “mere handmaiden to a settlement privately negotiated on the basis of unknown facts.”

“In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers,” he wrote. “But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”

The judge threw out the settlement, and ordered the two parties to argue their sides in the full sunshine of an open courtroom. The trial is scheduled for this summer.

“Part of this seems like an offshoot of Occupy Wall Street, you know, where you are just mad at the bankers,” said Adam C. Pritchard, a law professor at the University of Michigan. “That just seems inappropriate on the part of the judge if that is what is going on. If the goal is to stick it to the bankers, that is not the judge’s job.”

Friends and colleagues of the judge’s say he is not the Lone Ranger some would cast him as.

“People call him a populist and a firebrand, but that’s not really his personality,” said John C. Coffee, a professor at Columbia Law School who has co-taught a course on white-collar crime with Mr. Rakoff for the past 23 years. “He is a much calmer, quieter guy. He is not a grandstander. He is not trying to lead a movement.”

Judge Rakoff declined to be interviewed for this story, saying that it would be inappropriate, in light of the attention the Citi case received, to be preening before microphones.

(“I wish he would start giving interviews again,” one friend said, “so you all would stop calling me.”)

Legal observers and friends describe Judge Rakoff as bringing a prosecutor’s ferocity and a deep knowledge of securities law to the bench.  He grew up in the Mount Airy section of Philadelphia, an upper-middle-class enclave in the northern reaches of the city, attending the prestigious Central High School. He was a high school debater who ran for student body president, and lost, a high school friend recalls, to “a popular jock.” His father was a pioneering fertility doctor; his mother worked in the public school system. He went to Swarthmore and Harvard Law, and after clerking for a federal judge, did a long stint as a prosecutor in the U.S. Attorney’s office securities fraud bureau.

“It was an extraordinary time,” said Rusty Wing, a partner at Lankler Siffert & Wohl who worked alongside Mr. Rakoff then. “You are very much a band of brothers, and you perceive yourself as wearing the white hat, doing the right thing, doing justice.”

After time at two white-shoe law firms, Mr. Rakoff was appointed to the judiciary by President Clinton in 1995. But despite his increasingly mythic status among his admirers, he has not moved up the judicial ladder from his district court judgeship.

And he is unlikely to in the future, due mainly, legal experts say, to a 2002 ruling that claimed that the death penalty was unconstitutional, calling it “the state sponsored murder of innocent human beings.”

Then, he publicly revealed that although he found the death penalty to be “sufficiently fallible,” he could sympathize with victims’ families—his own brother, Jan, had been brutally murdered 17 years prior in the Philippines, and the assailant was never properly brought to justice.

“He found the death penalty unconstitutional, and the Justice Department doesn’t accept that,” said Professor Coffee. “ Any softness on the death penalty would be a problem for the confirmation process.”

Adds another friend, “He was aware at the time he made the decision that it was a political disqualifier.”

Instead, Mr. Rakoff threw himself into the district court, where judges are far closer to the lived experience—rather than the realm of legal theory that appellate-level justices face—of those before them in their courtroom.

“The district court is a form of combat. I think he likes that,” said another one of the judge’s brothers, Todd Rakoff, himself a professor at Harvard Law.

Because he has developed a reputation for outspokenness, there is a fear among some court-watchers that his words will be blunted.

“Rakoff has a reputation for being something of a maverick; it would be different if someone who was viewed as much more conservative or more mainline did this,” said one attorney who has closely followed the judge’s career. “It’s hard to predict what kind of impact it will have, but it will certainly force other judges to think about what Judge Rakoff did.”

The judge’s primary objection to the SEC’s settlement with Citi was that the agreement was predicated on the bank neither admitting nor denying wrongdoing in costing their shareholders $700 million due to the company’s shaky bets on mortgage-backed securities. From the agency’s perspective, the language is necessary since it helps shield the company from future litigation. In return, the company agrees to pay a higher fine upfront. If the bank were forced to admit wrongdoing, it would have less incentive to settle, which would raise the prospect of squaring off against the SEC in court. But from the SEC’s perspective, the agency would be out-gunned at a trial against a major financial institution, and it would mean having less resource to police more instances of wrongdoing.

“This doesn’t seem like a sustainable equilibrium, where we are going to send these financial companies into litigation and we are going to bankrupt a certain percentage of them,” said Professor Pritchard. “Presumably, the Federal Reserve and the banking regulators would consider that to be an adverse development. You start bankrupting financial institutions to send them a message, that is going to be a very costly message.”

Even those who agreed with the message from the judge have been less than sanguine that the decision could at last sever the too-close-for-comfort links between the banks and those who are supposed to regulate them.

“This is not precedent setting. This is judge who is on a bit of a crusade,” said William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street. “I admire him for it, but it’s not changing anything in the long run. People on Wall Street aren’t looking at this. Their legal departments may be, but for them it’s just the cost of doing business.”

But at the very least, the fact that a sitting judge essentially told the SEC that it is derelict in the most central aspect of its job must be a little embarrassing, right?

“I don’t know if they are capable of embarrassment down there,” he said.

The hope, though, is that after being publicly admonished, the SEC will begin to concentrate its resources on bringing meaningful enforcement action, or at the very least cease claiming that it is incapable of doing the job it has been tasked with.

“One thing they can’t hide behind is a lack of manpower,” said Mr. Spitzer. “They have thousands of lawyers. They have more resources than anybody needs. We are now at a point where it would be very refreshing to have the chief of enforcement down at the SEC say that they will never accept ‘neither admit nor deny’ unless, say, the financial firms agree to free the top five people who were involved with the department that oversaw the wrongdoing.”

SEC insiders say that the agency is bracing for more judges following Mr. Rakoff’s approach. And now they have the added bonus of facing a long trial against the high-priced lawyers from Citi, something they had hoped to avoid.

“They feel tremendously embattled. They are getting attacked on all sides,” said one former high-ranking agency official. “They believe that they are the law-enforcement agency here and that this judge and other judges should give them the deference to decide what the enforcement should be.”

But now that one judge has stepped out and said that the judiciary should not be a rubber stamp, such deference is unlikely in the future as other judges will have to weigh their own decisions against Judge Rakoff’s.

“The SEC’s current pattern is like if they caught John Dillinger walking into a bank with  a sawed-off shotgun and giving him a ticket for double parking,” said Professor Coffee, Mr. Rakoff’s teaching partner. “I don’t think the SEC would have dared settle this way if they had known that they were going to get Rakoff as the judge. He’s a prosecutor. You admit guilt, you do jail time. I think he feels that’s the way it should be.”

dfreedlander@observer.com

twitter.com/freedlander