Fred Goodwin and other former directors at Royal Bank of Scotland are facing a potential £4bn legal claim from disgruntled shareholders.
The RBS Shareholder Action Group, which represents 12,000 private shareholders and more than 100 institutions, claims the directors misled investors in the lead-up to its rights issue in 2008.
The group said the bank "misrepresented its underlying strength" and "omitted critical information" in the prospectus for the fund raising.
RBS launched the £12bn rights issue to shore up its balance sheet after its disastrous acquisition of the Dutch bank ABN Amro. However, the RBS share price collapsed by 95 per cent within months, and it had to be bailed out by taxpayers in October 2008.
A spokesman for the group said: "This is a giant step forward for the many thousands of ordinary people who lost money as the result of inexcusable actions taken by banks and their directors in the financial crisis.
"Now, for the first time, some of these directors will have to answer for their actions in a British court."
As well as Mr Goodwin, the group has started proceedings against RBS itself, its former chairman Tom McKillop, former investment bank chief Johnny Cameron, and former finance director Guy Whittaker.
The group, which lodged the case in the High Court in London yesterday, estimates that the final claim may be as much as £4bn.
The legal action is the second the bank has faced in less than a week. On Friday, a group made up of 21 financial institutions, including pension funds representing British coal miners and electricity workers, funds from Germany, Italy, Switzerland and Luxembourg, and retired schoolteachers from the US state of Illinois, also teamed up to sue RBS.
Stewarts Law, the City law firm which is acting on behalf of the claimants in that case, alleges that the RBS prospectus for the rights issue contained "serious omissions and mis-statements" and "the shareholders are entitled to compensation".
In contrast to the RBS Action Group, Stewarts Law did not put a value on the claim. However, the law firm said on Friday: "The claimants allege that the prospectus on which the rights issue was based was defective in that it contained material mis-statements and omissions.
"The claimants maintain that although the prospectus portrayed an image of the bank being in a state of financial good health and stability, the reality was very different, and that had the truth been known, the take-up of shares under the rights issue would have been severely impacted," it added.