Honestly, I am hugely anti-veto (as a person in a secondary relationship with a married woman, I find it really really messed up and awful), and yet I think this is one circumstance where it would've been completely warranted. You had a mutually agreed-upon boundary -- no cheaters. She was almost certainly cheating (the real test would've been for your husband to just say "give me his email address, I'll talk to him directly"... which I'm sure she would never have agreed to).
I mean, no cheaters is an awesome rule!!! If someone is cheating, they are lying to the person who is supposed to mean the most to them. And if they're willing to do that, you can be damn sure they'll be willing to lie to you too. So, bottom line, you can't trust this woman. Why should you be ok with your husband opening his heart and body, and by extension yours, to someone untrustworthy? Just, no. He clearly didn't respect that rule the way you did, because he was infatuated. I can certainly see why that would make you upset, he was opening both of you up to danger.
No crazy people is another awesome rule. And she seems crazy. Just, completely unable to be straightforward about her desires, or to stop engaging in manipulative behavior. Ick.
So, yeah, I'd say the one place you messed up was by not putting your foot down sooner. You recognize that, clearly, so next time you'll know the right thing to do. I don't think there's any reason at all to think that you can't watch your partner be with other people. I bet this would have gone down way, way, way differently if he'd been honest with you from the start (really, his excuse is kinda lame... sounds more like he was just scared), and if she hadn't been so messed up about everything.
Give it a little time, then maybe he can try again, but IF AND ONLY IF he can promise that this time he'll adhere to the honesty, no-cheaters, and no-crazies policies. Seriously, it's not that much to ask. Hopefully he's learned something from all this too.
Me, 30ish bi female, been doing solo poly for roughly 5 years. Gia, Clay, and Pike, my partners. Davis, ex/friend/"it's complicated." Eric, Gia's husband. Bee, Gia and Eric's toddler.