The move by the SEC will embolden investors waiting for a regulator to act and give the green light for any lawsuits, Harvey Knight, a consultant at the international law firm, told this publication.

Knight's predictions already bore fruit after the Financial Services Authority, the UK regulator, launched its own investigation into the Goldman Sachs affair. “Now that the FSA has launched a formal enforcement allegation against Goldman Sachs, it seems that the SEC’s action in filing fraud charges against Goldman Sachs has fired the starting gun on a wave of regulatory actions relating to collateralised debt obligations (CDOs). There has been much talk of co-ordinated regulatory actions as a result of the credit crunch but until today, this had yet to come to pass. This case could be the game changer and indeed, it has been reported that BaFin, the German regulator, will also be seeking information from the SEC."
 
“Regulatory actions often give rise to civil litigation. CDOs were widely sold in the years leading up to the credit crunch and many investors have been considering civil actions for mis-selling. The scale and high-profile nature of this case could give investors confidence that their own cases could succeed. Those bringing actions, either against Goldman Sachs or other sellers of CDOs, could range from high net worth individuals to major global financial institutions," he said.

Knight joined the law firm last year to head up a new practice in the UK that represents individuals in their dealings with financial regulators. As a result, he has watched with interest how the US financial watchdog has moved on the Goldman Sachs case.

Goldman Sachs, seen as having emerged relatively unscathed by the financial turmoil compared to its rivals, became embroiled in a damaging scandal late last week. The SEC said that in early 2007, as the US housing market came under pressure, Goldman Sachs created and sold a CDO linked to sub-prime mortgages without disclosing that hedge fund Paulson & Co – which is now renowned for making big profits by shorting such assets - helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1.

"The SEC’s action against Goldman Sachs will give other parties confidence that their concerns have merit regarding issues such as the sale of CDOs. It opens the floodgates and could lead to a rush of litigation and regulatory actions. Because CDOs were sold so widely, we could see civil actions being brought by a range of parties, from high net worth individuals to major global financial institutions,” Knight said.

The Goldmans' employee at the centre of the issue is based in London and has FSA approval, highlighting the potentially international scope of this scandal and any associated litigation, he said.

The key issue at stake is whether litigants will wait for regulators to investigate any findings in relation to their potential concerns or act in advance in issuing civil actions.

"It's a strategic issue for the concerned investor(s) whether to wait for a regulatory investigation to be commenced and completed to see the findings or whether to move ahead in the civil courts in the UK and/or the US," Knight said.

In the UK, Withers is acting for a high net worth client who is suing an investment bank that has been the subject of  regulatory action by the FSA and in the US is already handling subprime/CDO cases.

Meanwhile, a spokesperson at FSA told WealthBriefing: “As you would expect the FSA is investigating the circumstances of this case and whether there are any implications for the UK regulated entities of Goldman Sachs.”

“If there are, we will take appropriate action. We work closely with overseas regulators and will be cooperating fully with the SEC's investigation,” the regulator said, declining to make further comment on details.

Long before the Goldman Sachs saga, there had been concerns about the opacity of the CDO market and fears that the bosses of some of the banks involved did not fully understand what these financial packages contained, the risks, or the dangers presented by exposure to the sub-prime mortgage market.