Last week, a federal appeals court overturned U.S. District Judge Jed S. Rakoff’s decision to reject a $285 million settlement between Citigroup Global Markets and the Securities and Exchange Commission.

At issue was a proposed settlement resulting from claims that the bank misled investors in 2007 when it sold mortgage-related securities while the bank simultaneously bet against the debt as the U.S. housing market began to falter.

Rakoff, in reviewing the terms, disagreed with a long-standing SEC policy of letting many corporate defendants settle without admitting or denying the agency’s charges.

In voiding his decision, the appeals court has effectively shackled the only institution left that might be able to act to restore the rule of law in the financial services marketplace.

These actions may include the occasional rejection of a settlement negotiated by the SEC. To argue otherwise is to make the lower court a rubber stamp, approving all consent decrees placed before it. One might ask, why have a (lower) court review at all?

This decision will harm the public, the financial services industry, small business owners, and ultimately, the country.

It sends a signal that if a group of large financial institutions commit fraud as part of systematic, industry-wide effort, costing the country trillions and driving the nation into recession, it can still keep out-size and fraudulently obtained gains.

In the Citi case, the damage calculation ($285 million) is wrong. It is much smaller than it should be. This decision effectively supports the entity that allegedly committed the fraud and the institution that failed to stop it. The appeals court assumes SEC-negotiated consent decrees ultimately protect the public from harm. This assumption is clearly unwarranted given recent events.

The creation of new federal agencies (such as the Consumer Financial Protection Bureau) and the expansion of federal law (such as the Dodd-Frank Wall Street Reform and Consumer Protection Act) testifies to the ineffectiveness of the SEC. In an era of massively elevated fraud, courts must be allowed to step in.

That lower courts have routinely, until this point, rubber stamped consent decrees offered by the SEC that contain no admission of guilt is not the issue. The public interest is. Likewise, the SEC’s concern for expedience over justice is also contrary to it’s mission, especially since a fairer settlement would help prevent recidivism.

Markets cannot survive continuously elevated levels of fraud, since fraudulent practices mask an entity’s true value and misallocates capital by moving investment dollars from deserving entities and companies to unworthy ones.

Without meaningful reform there remains a significant and growing risk that our economic system will simply cease functioning.

William Michael Cunningham is a University of Chicago-trained economist. He filed a friend-of-the-court brief s in both the Southern District of New York and in the Second Circuit Court of Appeals regarding this case. A social investor adviser in Washington, he is the author of “The Jobs Act: Crowdfunding for Small Businesses and Startups.”