A federal appeals court has thrown out a controversial 2011 ruling by a judge who refused to approve a $285 billion settlement between Citigroup (C) and the Securities and Exchange Commission, saying the deal “failed to address the public interest.”

The U.S. Second Circuit Court of Appeals in New York said federal judge Jed Rakoff  “abused (his) discretion by applying an incorrect legal standard” when the judge challenged the pact negotiated more than two years ago by Citigroup and the SEC over allegations of fraud tied to mortgage-backed securities.

In his November 2011 ruling, Rakoff, a U.S. District Court judge in Manhattan, criticized the settlement because it provided no “framework” for determining whether the penalty adequately addressed the allegations.

In addition, the judge took a dim view of the agreement because, like many civil settlements with the SEC, it allowed the defendant to pay a fine without admitting to any wrongdoing.

Rakoff  wrote in the ruling: “The SEC's long-standing policy--hallowed by history, but not by reason--of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.”

The appeals court ruled that Rakoff overstepped his authority by rejecting the deal based on his belief that the settlement didn't serve the public interest because it didn't include an admission of guilt.

The SEC, the judges ruled, in seeking to avoid prolonged litigation through settlements, “is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.”

The settlement has now been returned to Rakoff by the appeals court and Rakoff must review the deal again or pursue another appeal.

Rakoff couldn’t immediately be reached for comment. A Citigroup spokesman declined to comment.

SEC Enforcement Director Andrew Ceresney said in a statement that the agency is “pleased” with the ruling “reaffirming the significant deference accorded to the SEC in determining whether to settle with parties and on what terms.”

Ceresney said the SEC “has and will continue to seek” admissions of guilt in appropriate cases, but that “settlements without admissions also enable regulatory agencies to serve the public interest by returning money to harmed investors more quickly, without the uncertainty and delay from litigation and without the need to expend additional agency resources.”

Rakoff has been unusually outspoken for a federal judge in his dissatisfaction with how the government has handled allegations of misconduct by large financial institutions that contributed to the financial crisis of 2008.

His criticism of deals that don’t require defendants to admit guilt triggered a vigorous debate over the practice and led to changes initiated last year by new SEC Chair Mary Jo White, who said the agency would start to require more admissions of guilt especially in particularly egregious cases of fraud against investors and the public.

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