That represents a significant expansion of the impact of the Citigroup case, in which Judge Jed S. Rakoff of the Federal District Court in New York threw out a proposed settlement between the company and the S.E.C.

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 S.E.C. enforcement cases rely on similar, negotiated settlements.

In a Dec. 20 letter to the S.E.C., Judge Rudolph T. Randa of the Federal District Court for the Eastern District of Wisconsin questioned the commission about its proposed settlement of fraud charges against the Koss Corporation, a Milwaukee-based maker and seller of stereo headphones.

Judge Randa asked the S.E.C. 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 S.E.C. v. Citigroup Global Markets.

John Nester, an S.E.C. spokesman, said, “We will provide the court with the information as requested.” The S.E.C. has until Jan. 24 to file a response.

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. The company and Mr. Koss were also charged with failing to maintain adequate financial controls. They agreed to settle the case without admitting or denying the charges.

Such language is standard in S.E.C. settlements, but Judge Randa raised concerns about the vagueness of a proposed injunction that would restrain Koss from violating the same securities laws. The settlement would require the company to maintain adequate records and a system of internal accounting controls.

“If enforcement becomes necessary,” he 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 S.E.C. was not required to get a court injunction to settle fraud cases, if it did so the court should not rubber-stamp an agreement.

Judge Randa also cited an earlier Rakoff opinion, in a 2009 S.E.C. case against Bank of America, in which the judge declined to accept a proposed settlement and made the parties draw up another agreement, which called for a bigger fine against the bank.

In 2010, two federal judges in the District of Columbia questioned the adequacy of proposed S.E.C. settlements, one with Barclays and another in an unrelated case involving Citigroup.

The S.E.C. and Citigroup have appealed Judge Rakoff’s most recent decision, and the United States Court of Appeals for the Second Circuit on Tuesday 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.”

Article source: http://www.nytimes.com/2011/12/29/business/judge-in-wisconsin-challenges-sec-settlement.html?partner=rss&emc=rss