As the details emerge on the Goldman Sachs financial scandal, the wealth management industry needs to be ready for the fallout, such as potential lawsuits launched by HNW investors against the US bank.

Just when we thought the worst of scandals from this financial turmoil had passed, here comes Goldman Sachs’ alleged outrage of dishonestly playing both sides of a market on products it was selling. 

The fine details of the scandal need not detain us here, which given the complexity of the details, is just as well. What interests this publication, however, is whether, and how, the affair will affect wealth managers and their clients. And it is not obvious what all the concrete ramifications are although some effects are fairly easy to predict, which is why we need readers to come forward and tell us about any issues they see arising from this business.

To recap: Goldman Sachs has been accused by the US Securities and Exchange Commission of committing fraud in a complex transaction involving collateralized debt obligations.

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.

A number of issues are raised by this affair – although it has to be said at the outset that Goldman Sachs is vigorously denying any wrongdoing. For a start, the affair highlights the potential conflicts of interest that can occur when an investment firm sells products to one set of clients while simultaneously dealing with clients in another area who may have diametrically different demands. In fairness, there is nothing necessarily wrong with a bank selling a product and then hedging any risk exposure it has – this is a routine, even commendable activity. Goldman Sachs’ alleged fault, however, is in not fully disclosing to clients what was involved in the CDO it was selling and the fact of of Paulson's involvement.

Another issue is that of reputation. Goldman Sachs has a large wealth management business. Some of its clients will have some hard questions to put to the bank about this affair. As we have seen in the case of firms such as UBS, woes at an investment bank can alarm clients in a different part of a banking group. This saga will add ammunition to the case for “pure-play” private banks.

If fraud or other serious wrongdoing is proven, of one thing we can be sure: lawsuits. There are likely to be lots of them, so my legal sources say. And they will not just take place in the US, as one of the Goldman Sachs traders involved in the affair was based in London. And let’s not forget that one of the banks hit by the alleged fraud – Royal Bank of Scotland – is the parent of Coutts, the UK private bank, and has had to be bailed out by the taxpayer. Today, the Financial Services Authority, the UK watchdog, launched a probe into the matter.  

A flood of lawsuits can be expected if the SEC brings a successful case against Goldman Sachs. Other banks – UBS, Deutsche Bank and Merrill Lynch – have been the subject of litigation concerning CDOs in the past; the Goldman Sachs affair potentially is far more serious.

We saw with the Bernard Madoff saga, the collapse of Lehman Brothers and problems of AIG that some of the investors who got hit were high net worth and UHNW clients of private banks. It will be interesting to see if any banks join the list of plaintiffs seeking recompense from Goldman Sachs.

And of course, there is the politics of all this. In the UK, figures such as Gordon Brown – now fighting to stay in power – are already pouncing on the matter. We can be sure that President Barack Obama, who has pushed for big banking groups to be curbed and for trading activities to be split off, will renew his calls with fresh vigor. 

Those in the financial industry who want to see politicians take more care and time in framing regulations than they have in the past will be disappointed, as the pressure for regulatory change will gather pace after this scandal. There is the not entirely reassuring example of the US Sarbanes Oxley law, introduced in the aftermath of the Enron and WorldCom scandals, to show what happens when lawmakers legislate in haste (that is not to say that that particular law is all bad, far from it).

In the case of the latest alleged wrongdoing, if it is a fairly straight case of fraud, then there are centuries-old laws against that. There is no need to reinvent the wheel to deal with the crime of conning a client. But I am afraid our lawmakers measure themselves not by enforcing existing laws, but all too often, by creating new ones.

It could be a long, hot summer for Goldman Sachs, and almost certainly, a lucrative one for the legal profession. We can count on that.