NEW YORK —

From a courtroom in Manhattan, not far from the epicenter of the nation's financial crisis, a longtime federal judge is becoming a hero to many and a nightmare to some for demanding greater accountability in cases of alleged Wall Street fraud.

Jed Rakoff is driving regulators nuts by refusing to rubber-stamp the kind of deals that have long defined Securities and Exchange Commission justice — boilerplate settlements in which companies use shareholders' money to pay fines while they neither admit nor deny doing anything wrong.

The latest example called for Citigroup to pay $285 million for alleged misconduct during the mortgage meltdown.

The potential effect of Rakoff's stand goes beyond the financial arena to other industries and regulators that rely on negotiated settlements.

"This is Jed Rakoff against the world," said Joel Seligman, a scholar of securities law.

The dispute seemed to take on a more personal edge over the holidays, when Rakoff accused the SEC of blind-siding him during legal maneuvers.

And the battle lines became sharper this month when the Business Roundtable, a major corporate lobby, weighed in on the side of the SEC in its quest to see Rakoff's ruling in the Citigroup case.

The judge's fans see him as the rare authority trying to impose Wall Street penalties that fit the offense.

Critics see him as a headline-chaser who could end up undermining his own agenda by forcing the SEC to actually win its cases.

"Novel" and "potentially dangerous," the Business Roundtable said of his position.

Largely lost in the din are deeper truths about the man who, for better or worse, could single-handedly force a revolution in the way the government polices Corporate America.

No Wall St. novice

First, far from being an outsider to the world of white-collar enforcement, Rakoff, 68, is part of an old boys' network that dominates Wall Street justice.

Earlier in his career, as a Justice Department prosecutor and then a white-collar defense lawyer, Rakoff worked closely with the SEC. Second, Rakoff isn't just calling for Wall Street to be held accountable. He's also insisting that the government be held accountable when it uses its power to make accusations and exact penalties. Law enforcement, he argues, should be more than a government shakedown.

"An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous," he wrote. "If its deployment does not rest on facts — cold, hard, solid facts, established either by admissions or by trials — it serves no lawful or moral purpose and is simply an engine of oppression."

The SEC complains that Rakoff would require it to spend more time and money on trials, thereby reducing the number of cases it can pursue.

But there's another dimension. By insisting on proof — not just by tying up resources — Rakoff could deter regulators from taking some enforcement actions.

In that sense, the rulings that have given Rakoff such celebrity or notoriety of late are the culmination of a long-held concern for civil liberties.

On Sept. 11, 2001, he looked out his office windows in horror to see people jumping from the inferno at the nearby World Trade Center. Yet he later fought what he feared were abuses of power in the government's response.

"If, in the name of combating terrorism, we so restrict our own freedom, have we not thereby lost part of the very battle we seek to win?" Rakoff said in a 2003 commencement speech.

As a Harvard law student and opponent of the Vietnam War, he was in Harvard Yard in April 1969 when student activists seized an administration building and ejected the deans, he said.

Yet Rakoff could not identify with the demonstrators. In their intolerance of dissent, he said in an interview, "I felt that the students had their own totalitarian tendencies."

And, having lost a brother to murder, Rakoff recalled, there was a time when he would have enthusiastically supported the death penalty. (His brother died in the Philippines, where the killer got a three-year sentence.)

But later, after much research and contemplation, Rakoff issued an opinion declaring the death penalty unconstitutional on the grounds that justice is fallible and innocent people could be executed.

The son of a fertility doctor and a guidance counselor, Rakoff attended an elite public high school in Philadelphia and went on to Swarthmore, where he was editor of the newspaper and president of the student council.

He spent a summer working for the Congress of Racial Equality and was on the Mall in 1963 when Martin Luther King Jr. delivered his "I Have a Dream" speech.

At Oxford, he wrote a master's thesis on Mohandas Gandhi, the leader of India's independence movement whose nonviolent tactics helped inspire the U.S. civil-rights movement.

Culturally, he stood apart from trends sweeping campuses in the 1960s. "I may be one of relatively few people from the '60s who's never even had any marijuana, haled or non-inhaled," he said.

He explored a career in newspaper journalism but was put off by what he sensed as the cynicism of older reporters — a defeatist view that they could write all day about the truth but it wouldn't make a difference.

He aspired to write stage musicals. His plan was to work at a law firm during the day and write the great American musical at night, he said, but he discovered that the law firm required his days and his nights.

With great disappointment, he abandoned his theatrical dream. "I guess what I really realized was, if you're going to be good at something, you have to give it your total attention," he said.

He left a prominent firm to join the U.S. Attorneys Office in Manhattan in 1973 and eventually led its business and securities fraud unit.

White-collar defender

Largely to boost his income, in 1980 Rakoff jumped to a corporate law firm. He joined Mudge Rose in New York at a time when it was unusual for such firms to have criminal-defense practices. It was a prescient move: White-collar defense was about to become a growth industry.

Rakoff's representation of Martin Siegel, a high-level investment banker who sold inside information to legendary fraudster Ivan Boesky, put him in the thick of one of the biggest legal dramas to hit Wall Street.

The case against Siegel was very strong, Rakoff said, but "there was a human being here who had to be salvaged because he was not an evil man."

Siegel pleaded guilty, cooperated with the government, served two months in prison and returned to a waterfront mansion in Florida.

After saving enough money to return to the government payroll, Rakoff aimed for a seat on the bench. Since becoming a judge in 1996, he has made a mark on subjects as varied as the WorldCom accounting fraud and the FBI's suspected abuse of a lie-detector test in the aftermath of Sept. 11.

Supporting a Freedom of Information Act request by The Associated Press, Rakoff ordered the government to release information about prisoners held at Guantánamo Bay, Cuba.

'Smartest guy in court'

His reputation for cross-examining lawyers and his widely acknowledged intellect lead them to prepare anxiously for appearances before him. One boiled it down to this: "He thinks he's the smartest guy in the court, and in almost every instance he's right."

Where some judges almost monastically avoid publicity, Rakoff is outspoken.

In a recent email that began by reviewing his long-ago record as a prosecutor, he lamented that federal sentencing guidelines now put pressure on even innocent defendants to plead guilty, shifting power from judges to prosecutors.

"Worst of all, it means that virtually all federal criminal justice is conducted behind closed doors. That is because a trial is nearly the only place where the entire criminal-justice system is put to the test of truth: Do you have the proof of guilt, or don't you?"

In a follow-up, he said, "And, to state the obvious, a system of justice that chiefly operates behind closed doors will sooner or later be a system that ... leads to abuse."

It sounded a lot like his critique of the SEC.

When it comes to passing judgment on the SEC, the judge has repeatedly found cause to scold.

He issued a severe rebuke to the agency in a recent insider-trading case against Rajat Gupta, a former McKinsey chief and Goldman Sachs board member.

In so doing, he sided with Gupta defense lawyer Gary Naftalis, a fellow veteran of the U.S. Attorney's Office in Manhattan whom the judge described as a close friend. One of Naftalis' sons clerked for Rakoff, and Rakoff officiated at the son's wedding.

The case spotlighted Rakoff's membership in the old boys' network.

No recusal

The judge said he never recuses himself when he happens to be close to one of the lawyers in a case. "When I put on the robe and go up on the bench, I could care less whether it's my best friend or my worst enemy," he said.

Elaborating in an email, Rakoff wrote, "Whenever any lawyer (close friend or just acquaintance) has a case before me, I cut off all social contact with that person throughout the duration of the case.

"Thus, for example, I have not had any out-of-court contact whatsoever with Gary Naftalis for over a year (since when his initial Gupta matter came before me)."

In 2009, he refused to go along with a settlement under which Bank of America would pay a $33 million fine, prompting the two sides to renegotiate for $150 million. He denounced the original deal as "a contrivance designed to provide the S.E.C. with the facade of enforcement."

In early 2011, he grudgingly accepted an SEC settlement with a semiconductor company while mocking the neither-admits-nor-denies provision. "The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC," he wrote.

But in a civil insider-trading case involving New York hedge-fund mogul Raj Rajaratnam, Rakoff sided with the SEC, arguing that it should have access to FBI wiretap evidence gathered in a related criminal investigation.

For that decision, an appeals court issued an extraordinary slap-down order known as a writ of mandamus, saying, in effect, that Rakoff was wrong.

Now, the SEC is seeking a similar writ against Rakoff, saying he went too far when he rejected the Citigroup settlement.

If the agency had to hold out for admissions of wrongdoing, the SEC says, defendants would refuse to settle, and the agency would be pinned down in court litigating and potentially losing its battles.

Rakoff is unmoved.

The SEC's approach, he wrote, is "hallowed by history, but not by reason." The proposed settlement "still leaves the defrauded investors substantially shortchanged" — they lost more than $700 million — and it asks the court to impose sanctions based on "mere allegations," he said in his November opinion.

Ralph Ferrara, who worked with Rakoff at the Justice Department, served as general counsel of the SEC and now defends clients in SEC cases, views Rakoff's action as remarkable from either side of the debate.

"On the one hand, Judge Rakoff ... has finally pronounced that the king has no clothes, and for the first time the world seems to be noticing the nakedness of the SEC on this issue," Ferrara said. "On the other hand, one could say, 'Look, Judge Rakoff has engaged in almost, in an unconstitutional encroachment.' "

Rakoff's legacy on the issue is in the hands of an appeals court. He's been knocked down before — notably when he ruled that the death penalty "is tantamount to foreseeable, state-sponsored murder of innocent human beings."

The judge said he still believes he was right about that, and in his chambers hangs an oversize copy of a newspaper article about his ruling.

"If you're never reversed on appeal," he said, "you probably have taken too narrow a view of the law."