Bear Stearns fund chiefs face New York judge

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Two former Bear Stearns hedge fund managers took the first "perp walk" of the credit crisis, as the FBI paraded them in front of the world's media to face charges of misleading investors and insider dealing.

Ralph Cioffi and Matthew Tannin were marched yesterday from the FBI's New York headquarters to appear before a judge in Brooklyn.

And prosecutors promised that these are just the most high profile arrests in their ongoing investigation of wrong-doing following the collapse of the mortgage markets. More than 400 people, mainly local brokers accused of foisting unsuitable mortgages on unsophisticated borrowers, have now been indicted, including 60 people on Wednesday alone.

Those unsuitable mortgages were packaged up and traded around the financial system and their collapse in value, when borrower defaults soared, has led to more than $400bn (£203bn) of losses. The collapse of the two funds run by Mr Cioffi and Mr Tannin, in July last year, was the first outward sign of the severity of the crisis. Lawyers for the two men said they would vigorously defend their innocence.

"The subprime crisis took everyone by surprise," said Ed Little, Mr Cioffi's attorney. "Ralph Cioffi's funds lost money in exactly the same way. Because his funds were the first to lose might make him an easy target but doesn't mean he did anything wrong." Mr Tannin's lawyer, Susan Brune, said he was being made a scapegoat for the market crisis.

The indictment, unsealed yesterday, says that the pair discussed as early as March that the funds were in trouble, but solicited new investors by promising them an "awesome" investment opportunity.

Prosecutors lean heavily on email correspondence, including on one email sent via Mr Tannin's personal email account where he said that, if their internal research was correct, the sub-prime mortgage market was "toast". They hid the extent of their fears from colleagues on the trading desk and from their superiors at Bear Stearns, it is alleged, and Mr Cioffi lied on a conference call with investors, denying that existing investors were stampeding for the exits, despite knowing that one of the funds' biggest backers had asked to take out $57m.

Mr Cioffi even transferred $2m of his $6m investment out of the funds – without telling clients.

The two men face four counts of fraud and conspiracy, while Mr Cioffi faces an additional charge of insider dealing.