Litigation involving one of the many mortgage derivative deals that helped bring on the recession and the current tight lending environment is going to trial rather than going away after a federal district judge in New York refused a proposed settlement between Citigroup and the U.S. Securities and Exchange Commission.

Judge Jed S. Rakoff ordered a trial in July for the case that involved a billion-dollar mortgage securities fund that was called Class V Funding III. He consolidated it with a trial for the Citigroup employee accused of setting up the deal.

The S.E.C. said Citigroup had picked the mortgage securities in the fund, told investors someone else had made the choices, and then shorted them because it figured they would sink.

Citigroup would have conceded negligence but not any wrongdoing, and that apparently was too much for the judge.

In his decision, Rakoff said that not stating the facts in the settlement was wrong.

"An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous," the judge wrote.