* 2nd Circuit to review fraud settlement in September
* Judge Rakoff had rejected $285 mln accord
By Jonathan Stempel and Grant McCool
March 19 (Reuters) - A federal appeals court will wait until late September to review U.S. District Judge Jed Rakoff's rejection of a U.S. Securities and Exchange Commission fraud settlement with Citigroup Inc over mortgage investments.
The delay, announced Monday by the 2nd Circuit Court of Appeals in New York, should ensure that Rakoff's Nov. 28 rejection of the proposed $285 million accord remains the law for several months, though the court last week signaled that the SEC appeal would likely succeed.
In a brief order, the 2nd Circuit said it will hear oral argument in the last two weeks of September, and directed John "Rusty" Wing, a lawyer it appointed to argue in favor of the rejection, to submit his brief by Aug. 13.
Rakoff had recommended the appointment of Wing, a former colleague in the U.S. Attorney's Office in Manhattan.
The 2nd Circuit often takes several weeks or months to issue decisions after oral argument, but occasionally rules faster.
Citigroup's settlement was intended to resolve charges that the third-largest U.S. bank in 2007 sold $1 billion of mortgage-linked securities debt without disclosing it had bet against the debt. Investors lost more than $700 million, the SEC said.
Rakoff had ruled that because the settlement did not require the bank to admit or deny liability, he could not determine whether it was fair or in the public interest.
But the 2nd Circuit on Thursday chastised Rakoff for having appeared to overstep his authority by trying to dictate policy to the SEC, saying it had "no reason to doubt" the agency's representation that it had acted in the public interest.
The SEC and other federal agencies have long let companies settle without admitting wrongdoing. If Rakoff's decision is upheld, many settlements might become impossible to reach. At least two federal judges, in cases involving the SEC and Federal Trade Commission, cited Rakoff in questioning such settlements.
Robert Khuzami, the SEC enforcement chief, defended the practice of not demanding admissions at a Securities Industry and Financial Markets Association conference in Miami on Monday.
"It's not to say that we don't understand the demands by some members of the public and others for admissions, particularly in the wake of the financial crisis," he said.
Rakoff alluded to the Citigroup case at a hearing Monday over the settlement by New York Mets baseball team owners of a lawsuit related to Bernard Madoff's fraud. It was in response to a lawyer saying "Your lips to God's ears, your honor," a p hrase sometimes used as a synonym for "hopefully" in court.
"I would prefer from my lips to the Second Circuit," Rakoff quipped, p rompting laughter in the courtroom.
The case is SEC v. Citigroup Global Markets Inc, 2nd U.S. Circuit Court of Appeals, No. 11-5227.