Search warrants issued to the Serious Fraud Office against property magnates Robert and Vincent Tchenguiz are to be set aside.
The brothers were arrested and questioned in March 2011 after investigators swooped on their London headquarters during an inquiry into the collapse of Kaupthing bank, one of three Icelandic banks which failed at the height of the credit crunch in October 2008.
Both men were released on bail without charge pending further investigation.
At a hearing at London's High Court in May, their lawyers said that the warrants were unlawful as they were obtained by misrepresentation and non-disclosure to an Old Bailey judge.
Today, Sir John Thomas, president of the Queen's Bench Division, and Mr Justice Silber upheld their challenge and transferred the case to another branch of the court to consider the issues of causation and damages.
Sir John said: "We will make in due course declarations that the various seizes and searches consequent on a warrant to search the premises were unlawful. We will transfer the further conduct of the action to the Queen's Bench Division."
In June, the Serious Fraud Office (SFO) announced that the investigation against Vincent Tchenguiz would be discontinued and accepted that the warrants relating to him should be quashed.
In a complex ruling, the High Court judges said that in the application for the warrants there was a failure to set out the background, a lack of clarity, errors and a failure to put the matters that weighed against them being granted.
They said: "We have no doubt that, if what was in the information had been presented in such a way that the background was properly explained, the errors were corrected and the matters that weighed against the grant of the warrant had been drawn to the judge's attention, it would have made a real difference and he would not have granted the warrants."
They rejected a challenge to the lawfulness of the arrest of Robert Tchenguiz, saying that the "necessity test" was amply made out.
They criticised the conduct of the search carried out by five SFO employees and one independent lawyer.
"In our view, the policy of the SFO in using its own lawyers was misconceived, though it was, no doubt, adopted because of the lack of resources available to the SFO," the ruling stated.
How serious the consequences were in the circumstances of the case could only be determined by the evidence that would be heard in the Queen's Bench proceedings.
The judges added that the investigation and prosecution of serious fraud in the financial markets required proper resources, both human and financial, and it was quite clear that the SFO did not have such resources in the Tchenguiz case.
Sir John said: "In the present case, the result has been our decision to set aside search warrants against two well-known businessmen after a long investigation of transactions in the financial markets.
"In other cases, the result could have been the failure properly to investigate and prosecute successfully conduct where there could be no doubt as to its criminality and serious effect on public confidence in financial institutions and the financial markets.
"It is clear that incalculable damage will be done to the financial markets of London, if proper resources, both human and financial, are not made available for such investigations and prosecutions in the financial markets of London."
Later, Robert Tchenguiz said in a statement that, as a result of the SFO's actions, he and his family had suffered "enormous damage", not least to his reputation.
"I now intend to pursue my claim in respect of the damages I have suffered as a result of the SFO's illegal actions. I also intend to bring proceedings against the SFO in respect of my arrest," he added.
Vincent Tchenguiz said later: "The series of concessions made by the SFO following the raids on my home and offices had already shown that the search warrants were flawed.
"Today's judgment highlights that the orders for those searches, which have caused massive damage to my business and to my reputation, should never have been granted.
"They were the result of the SFO, under its former leadership, omitting pertinent facts and making misrepresentations to the court. I am glad that this judicial review will result in far-reaching changes in the law which will prevent others from suffering a similar injustice in the future.
"I will be seeking damages from the SFO - and from any other parties who contributed to the court being misled. My claims will reflect the substantial personal and business costs and losses that have directly resulted from the actions of these parties."
Later, the SFO said in a statement: "The SFO had conceded that serious mistakes were made in connection with the application for search warrants in this case but notes the reasoned tone of the judgment and the helpful comments it contains.
"The judgment and the SFO's concession highlight the importance of quality and accuracy in the drafting of information supporting warrant applications.
"This focus on quality underlies the reorganisation of the SFO already conducted by the new director, David Green QC.
"The restructuring and recent senior appointments are designed to provide inbuilt layers of quality assurance and avoid the repetition of such errors.
"The SFO will provide any assistance required to the suggested review of the process of obtaining warrants.
"The SFO will bring in specialist knowledge as and when required.
"We note that the court declined to consider the merits of the future of the investigation, this being the responsibility of the SFO as an investigating and prosecuting authority.
"The SFO will continue with the investigation with renewed focus and vigour.