NEW YORK - Two former Bear Stearns hedge fund managers were hauled into jail yesterday and charged with lying to investors about the collapse of the subprime mortgage market, perhaps signaling the start of a wave of prosecutions arising from the housing meltdown.
Ralph Cioffi and Matthew Tannin were accused of encouraging investors to stay in their hedge funds, heavily exposed to subprime mortgages, even as they knew the credit market was in serious trouble.
They were indicted on conspiracy and fraud counts, the first criminal charges to hit Wall Street in the housing market saga.
The implosion of their two hedge funds cost investors $1.8 billion and started the domino effect that led to the demise of Bear Stearns itself, which barely avoided bankruptcy in a rescue buyout by JPMorgan Chase & Co.
"This is not about mismanagement of a hedge fund," Mark Mershon, head of the New York FBI office, told reporters. "It is about premeditated lies to investors and lenders."
The case against Cioffi and Tannin appears to be based heavily on a series of e-mails that reveal panic and disorder behind the scenes at the hedge fund as its investments began to slide.
"The subprime market looks pretty damn ugly," Tannin wrote to Cioffi in April 2007. If internal reports were accurate, Tannin suggested, "I think we should close the funds now," and "the entire subprime market is toast."
The situation became so dire that Cioffi pulled $2 million of his own cash from the fund, but the pair still told investors they should stay in and that the outlook was good, prosecutors said.
Cioffi, 52, was arrested by FBI agents at his New Jersey home yesterday morning, and Tannin, 46, was taken into custody outside his Manhattan apartment building.
Both men pleaded not guilty at an afternoon arraignment and were released on bond. Cioffi's bond was set at $4 million, Tannin's at $1.5 million.
The men, who face up to 20 years in prison, left court with their wives and without speaking to reporters. They are due back in court July 18.
The mortgage market crisis "took the whole financial world by surprise," said Cioffi's attorney, Edward Little. "So our question is, why is Ralph Cioffi being charged in this case?"
Tannin's lawyer, Susan Brune, said he was "being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."
Legal experts said more Wall Street figures would probably be charged in the credit crisis, the latest front for white-collar prosecutors who brought - and in most cases won - high-profile cases earlier this decade after the fall of Enron.