Not so fast, Mary

They don’t call him Judge Dread for nothing.

An irked Manhattan federal court Judge Jed Rakoff yesterday fired a warning shot over the desk of Securities and Exchange Commission chief Mary Schapiro, ordering her lieutenants to a court hearing to explain a strangely weak financial settlement it agreed to with Citigroup.

Rakoff asked the SEC and the bank to explain to him why the $285 million deal was fair.

The deal, announced Oct. 19, settled civil charges brought against the country’s No. 3 bank for allegedly deceiving investors in a $1 billion collateralized debt obligation, or CDO, linked to toxic mortgages.

In selling the CDO, Citigroup failed to tell investors that it had a hand in selecting the assets — and that it was betting against the debt.

“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits not denies wrongdoing?” Rakoff asked the parties in a letter that set the Nov. 9 hearing.

“Given the SEC’s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the SEC’s charges are true?” the judge added.

Citi ultimately pocketed $160 million in fees and trading profits off the sales of the product and its failure, while Citi’s customers were left holding the bag for the default, the SEC said.

The allegations are similar to charges the SEC brought against Goldman Sachs last year, which resulted in top Goldman execs being dragged before Congress and a $550 million fine — the largest ever.

Rakoff also questioned Citi’s fine in comparison to Goldman’s, noting that Citi’s penalty portion is just $95 million, or “less than one-fifth” Goldman’s $535 million penalty.

“How can a securities fraud of this nature and magnitude be the result simply of negligence,” Rakoff asked.

Citigroup declined to comment.

“We look forward to responding to the questions raised by the court,” said SEC spokesman John Nester.

It isn’t the first time Judge Dread has put the brakes on the SEC’s efforts to cut a deal with a bank accused of serious wrongdoing.

In 2009, the judge made headlines when he called Schapiro on the carpet for a $33 million pact with Bank of America over allegations the bank misled shareholders about details of its Merrill Lynch acquisition.

Rakoff said the fine was paltry compared to BofA’s alleged misdeeds, and he demanded documents from both the SEC and the bank explaining the fine. He ultimately accepted a $150 million settlement with BofA, but not before criticizing the process as “half-baked justice at best.”

Eleanor Bloxham, CEO of the Value Alliance and Corporate Governance Alliance, said settlements in general are a flawed way of penalizing public company crimes because they cost shareholders while doing nothing to deter the behavior by executives.

“No settlements are a success unless the actions are stopped,” she said, adding that a better deterrent would be to penalize executive paychecks.