By Eleanor Bloxham
November 7, 2011

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE — To admit or deny — that is the question — or one of them anyway, that the SEC will have to address when they respond to Judge Jed S. Rakoff’s review of the regulator’s recent settlement with Citigroup. Although Citi has agreed to pay $285 million and make minor reforms, the bank is neither admitting nor denying that they failed to properly disclose the risks of mortgage-related investments to clients in the run up to the housing crisis.

But why would Citi (C) agree to such a payment and reforms if they didn’t violate regulations? This conundrum is not a new one for Judge Rakoff and one he raised in an SEC settlement case two years ago involving Bank of America (bac). In that case, although Bank of America had originally neither admitted nor denied the violations, when the case came under scrutiny by Rakoff, Bank of America went ahead and denied.

So Rakoff asked a reasonable question: why would a bank pay out shareholder dollars for something it had denied committing? If the bank did the deeds as the SEC contended, why weren’t individuals being punished in line with SEC guidelines, he had asked?

Along similar lines, in this most recent Citi case, Rakoff has asked the SEC to explain why the court should “impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing.”

Either there was a violation or there wasn’t. Which is it?

Not admitting wrongdoing poses other concerns. It may make it more difficult for defendants and their boards to mete out punishments.

The SEC settled with Goldman Sachs (gs) last year for almost two times the amount recommended in the current Citi case on similar charges. In that case, Goldman also neither admitted nor denied. The impact? Goldman’s 2011 proxy includes no recognition of the violations in the discussion of its top executives’ performance. The settlement is also not cited as a factor that led to any reductions in bonus pay. To the contrary, the discussion of the SEC settlement is only included as a factor that should be excluded as a one-time charge in reviewing Goldman’s profitability.

Bonuses, in fact, were up at Goldman in 2010, with all executive officers receiving higher paychecks than they had during the previous two years. It’s unclear how that aligns with the investment bank’s objective of using compensation to “enhance the firm’s culture of compliance.”

Rakoff and the SEC will need to wrestle with what kind of signal no admission of wrongdoing sends — and whether the lack of admission, by its own force, results in no penalty to managers, even in their paychecks.

In the current Citi case, Rakoff has also asked the SEC to explain how it plans to enforce the provisions of the settlement, putting a spotlight on whether the SEC has ever tried to take a company to task for violating a settlement.

As a matter of practice, the SEC does not follow up on settlements to ensure there are no violations, according to a spokesperson for the regulator.

The charges in the Citi case – along with the JP Morgan (jpm) and Goldman cases from this year and last — represent the same kind of alleged wrongdoing all three banks promised never to repeat when they settled with the SEC in 2003.

If no individuals face repercussions and there is no follow up either internally or from the SEC, how can there be any hope that we won’t repeat this all over again?

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, a board advisory firm. 

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