In the first of what might be more to come,  Judge Rudolph T. Randa of the Federal District Court for the Eastern District of Wisconsin has challenged the SEC over a proposed settlement of fraud charges against a publicly traded company, citing as a precedent the agency’s pending case against Citigroup and the rejection of its settlement by Judge Jed. S. Rakoff of the Federal District Court in New York. In a Dec. 20 letter to the SEC, Judge Randa questioned the commission about its proposed settlement of fraud charges against the Koss Corporation, a Milwaukee-based maker and seller of stereo headphones. Koss and its chief executive, Michael J. Koss, were accused of maintaining materially inaccurate financial statements, books and records from 2005 through 2009, a period when the company’s principal accounting officer embezzled more than $30 million from the company. They agreed to settle the case without admitting or denying the charges. Judge Randa asked the SEC for “a written factual predicate for why it believes the court should find that the proposed final judgments are fair, reasonable, adequate and in the public interest.” In doing so, the judge cited Judge Rakoff’s opinion and language in SEC v. Citigroup Global Markets. That represents a significant expansion of the impact of the Citigroup case, in which Judge Rakoff threw out a proposed settlement between the company and the SEC.  Judge Rakoff said he had rejected the Citigroup settlement because there were no established facts on which to base a decision whether the settlement was “fair, reasonable, adequate and in the public interest.” At the time of the November decision, lawyers who were watching the case noted that the ruling did not constitute a precedent that would bind other judges in New York or elsewhere.  But the fact that a federal judge halfway across the country cited the case less than a month later means that other judges have noticed the ruling — which is significant because most SEC enforcement cases rely on similar, negotiated settlements. “If enforcement becomes necessary,” Judge Randa wrote, “the terms of such a vague injunction would make it difficult for the court.” C. Evan Stewart, a partner at the New York law firm Zuckerman Spaeder, said that the judge in Wisconsin appeared to pick up on one of Judge’s Rakoff’s most prominent points — that while the SEC was not required to get a court injunction to settle fraud cases, if it did so the court should not rubber-stamp an agreement. The SEC and Citigroup have appealed Judge Rakoff’s most recent decision, and the United States Court of Appeals for the Second Circuit has put the case on temporary hold while it decides whether to grant an expedited hearing. “A lot of judges are going to take a little time to see what the Second Circuit does before falling in line behind Judge Rakoff,” Mr. Stewart said. But, he added, he believed that the most recent citing of Judge Rakoff “undoubtedly will not be the last.”  [Dealbook 12/29/11]