Federal agents exit 26 Federal Plaza with handcuffed former Bear Stearns hedge fund manager, Ralph Cioffi (centre), yesterday in New York. Indictments will be handed down on Cioffi and ex-manager Matthew Tannin, both accused of securities fraud in the wake of the collapse of the subprime mortgage market, which foreshadowed Bear Stearns' own demise. - Ap

TWO FORMER Bear Stearns managers have been arrested, federal authorities said yesterday, becoming the first executives to face criminal charges related to the collapse of the subprime mortgage market.

Matthew Tannin was taken into custody outside his New Jersey home on yesterday morning and Ralph Cioffi was arrested at his New York City home, the FBI said.

Authorities in Brooklyn were expected to release details later yesterday on the case against the men, who are ex-managers of Bear Stearns Cos hedge funds that collapsed last year.

A law enforcement official told The Associated Press that an indictment naming the men was the result of a year-long federal securities fraud investigation.

Misleading investors

The former executives are suspected of misleading investors about the risky subprime mortgage market, the official said, speaking on condition of anonymity because the outcome of the investigation is pending.

Tannin "is innocent", said his attorney, Susan Brune. "He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."

Cioffi's attorney declined comment yesterday and the United States (US) attorney's office did not return a call for comment.

The fallout from defaults on US mortgages has rattled the global economy and the American housing market.

Subprime mortgages, those issued to people with shaky credit, were repackaged as securities and sold across the globe.

The implosion of the hedge funds foreshadowed Bear Stearns' own demise, with the Federal Reserve having to intervene earlier this year to bail out the beleaguered bank.

Their collapse revealed how much damage had been done to the companies that bought, repackaged and sold the loans.

Despite positive assessments by Cioffi and Tannin, the Bear Stearns hedge funds failed in June 2007.

The funds had more than US$20 billion in assets before crashing.

Cioffi, 52, and Tannin, 46, already have been named in lawsuits brought last year by hedge fund investors, including Barclays Bank PLC, who allege they were purposely misled.

Barclays accused Bear Stearns of knowing for months that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth 'far less' than their stated values.

The bank alleged Bear Stearns managers "hatched a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments."

The complaint said Bear Stearns told Barclays that the enhanced fund was up almost 6.0 per cent through June 2007 - when "in reality, the portfolio's asset values were plummeting."

Last month, Bear Stearns shareholders approved JPMorgan Chase and Co's US$2.2 billion buyout at about US$10 a share. Back in January 2007, before mortgage defaults began clobbering banks and draining demand from the debt markets, Bear Stearns had traded at US$171 a share.