A report has accused Nottingham City Homes and the council's former housing service of letting down the city's tenants.
The Audit Commission stepped in after a routine inspection.
It found that council houses were not allocated to those most in need and people who knew housing officers were able to jump waiting lists.
Council leader Jon Collins said he was "appalled" and that "such alleged behaviour was possibly criminal".
An Audit Commission report said Nottingham's housing service was not consistently operating in the public's best interests between 2003 and 2005 when there were "failings in the culture, systems and management".
Management overhaul
Alison Rigg from the Commission said: "The people of Nottingham have been let down by the council's housing service.
"A culture prevailed where policies and procedures were not consistently applied and where staff felt unable to challenge things that appeared to them to be wrong.
"As a result, the allocation of tenancies, in particular, failed to match the fair, consistent and transparent standards that prospective tenants were entitled to expect."
She added that most of the events happened some time ago.
"All the senior managers at NCH have since left and there has been a complete overhaul of management arrangements and the introduction of a choice-based lettings system."
Councillor Collins said: "I'm appalled by what I read in this report and I expect local residents to be appalled.
"Residents can be assured that we will investigate these matters fully and that we will not hesitate to take appropriate action"
"The alleged behaviour of a number of people who worked for our housing service between 2003 and 2005 was completely unacceptable. We're sorry that it was possible for this to happen.
"At its worst such alleged behaviour was possibly criminal. At the very least it was a serious breach of the trust of the residents of Nottingham.
"Residents can be assured that we will investigate these matters fully and that we will not hesitate to take appropriate action, including disciplinary action."
Legal advice
The council will now determine its comprehensive response to the report which will be presented to a public meeting of the authority in February.
Councillors are taking legal advice and may ask the police to investigate.
Nottingham City Homes was set up in April 2005 and ran the housing service for the final six months of the period covered by the District Auditor's report.
Since then, the organisation has appointed a new chief executive and a new management team.
Paul Rowe, chair of Nottingham City Homes' board, said he shared Councillor Collins' concerns.
"We will work with Nottingham city council to investigate the cases and implement any outstanding recommendations in the report."
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