The unfolding scandal at Goldman Sachs which broke shortly before the weekend continued to send shockwaves around the financial and political world today, with lawyers predicting a wave of lawsuits.

The unfolding scandal at Goldman Sachs which broke shortly before the weekend continued to send shockwaves around the financial and political world today, with lawyers predicting a wave of lawsuits.

The Wall Street firm is due to report first-quarter results this week. Even before the scandal broke, the results were expected to attract hostile media and political attention due to an expected big jump in profits and potential large bonus payouts.

Goldman Sachs, which contains a large wealth management operation, has been accused by the US Securities and Exchange Commission of committing fraud in a complex transaction involving collateralised debt obligations. In particular, it is accused of selling such a product to investors and simultaneously helping renowned hedge fund manager John Paulson to short-sell securities connected to the CDO. The affair raises questions about how such firms, which straddle a number of business sectors, can be subject to conflicts of interest in serving different types of client where the same investments are involved.

While the affair surrounds the investment banking side of Goldman, the affair could indirectly affect other parts of its operations, if the firm’s reputation is seen to be badly hit. Goldman Sachs’ wealth management business typically is not forthcoming in its relations with the media. The firm has in the past turned down a request by WealthBriefing to interview it about its wealth management activities (WealthBriefing is a sister website of this publication).

In the US, the affair is building into a major political as well as banking issue. President Barack Obama has already proposed the idea of curbing the size of banks and splitting off functions such as derivatives trading and hedge funds from the retail, deposit-taking sides of a bank. The idea – which would ironically have prevented some recent mega-mergers such as Bank of America/Merrill Lynch – is sure to gain renewed momentum after the Goldman Sachs story broke.

Reports said that lawyers in the US predict a wave of legal action last night in the wake of the $1 billion fraud charge brought against Goldman Sachs by the SEC.

Richard Blumenthal, the Connecticut attorney-general, was quoted saying that he had begun a review of the case. “A key question is whether this is an isolated incident or part of a pattern of investment banks colluding with hedge funds to purposely tank securities they created and sold to unwitting investors.”

Lawyers are hunting for investors who lost money on Goldman’s Abacus products to join a potential action against the bank, reports said.

It is possible that some of those clients could be clients of wealth management firms.

One firm which lost $840 million on the Goldman investment, which is Royal Bank of Scotland, according to Bloomberg, has not commented on whether it is thinking of legal action.

The impact on RBS highlights how the issue is international in scope and politically toxic: RBS is now majority owned by the UK taxpayer after the bank was bailed out more than a year ago.

Goldman, which saw $10 billion wiped off its market capitalisation in the hours after the SEC’s charges were revealed, has emphatically denied the accusations.

The Wall Street bank could face legal and regulatory action in Britain and Germany after US authorities accused the bank of fraud politicians in both countries suggested over the weekend.

All three main political parties in Britain called for the Financial Services Authority, the country’s financial regulator, to investigate Goldman.

Gordon Brown, the UK prime minister, was reported saying over the Goldman Sachs case that he was “shocked at this moral bankruptcy. This is probably one of the worst cases that we have seen.”

In the past, financial scandals have been followed by legislation, but sometimes the reaction has been criticized for going too far, as has happened with the US Sarbanes-Oxley accounting standards introduced in the wake of the Enron scandal in the early Noughties.