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NEW YORK (CBS) ― It's the first criminal case of the credit crisis.

Two former Bear Stearns managers were arrested Thursday on charges linked to the collapse of a hedge fund that ignited the subprime mortgage mess.

Ralph Cioffi, 52, and Matthew Tannin, 46, were handcuffed and taken into custody by federal agents Thursday morning. The two men have been the target of a year-long probe by federal prosecutors.

The 28-page indictment cites a personal e-mail that Tannin sent to Cioffi, suggesting that the funds they managed for the company were "toast."

Just four days later, Cioffi and Tannin told investors there was little to worry about.

Lawyers for the two men say their clients are innocent and are being made scapegoats for a widespread market crisis.

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

The U.S. attorney's office in Brooklyn said it planned to announce conspiracy and fraud charges later Thursday.

In a separate but related action, the Securities and Exchange Commission filed a complaint Thursday in Brooklyn federal court. It alleges that in the first five months of 2007, Tannin and Cioffi "deceived their own investors, as well as the fund's institutional counterparts, by fraudulently concealing from them the full extent of the fund's deepening troubles."

The complaint says that in March 2007, Cioffi withdrew $2 million of his own money from a hedge fund without revealing it to other investors.

"Cioffi's clandestine redemption caused the Enhanced Leverage Fund to pay out $2 million at a time when the markets were weak and the fund was facing another month of losses, as well as escalating margin calls and forced sales," the SEC said.

"Although Cioffi had lost faith in the funds, as evidenced by his own redemption from the Enhanced Leverage Fund, he nonetheless falsely expressed his supposed confidence in the funds, encouraging investors to add money to the funds and attempting to dissuade them from redeeming," the complaint said.

Other e-mails between the two men reveal more doubts about the survival of the funds, the complaint alleges.

Tannin, the complaint says, sent one e-mail last March to a third fund manager with only question marks in the subject line. The e-mail said, "Is Ralph doing what he should be doing right now?"

Around the same time, it adds, Cioffi wrote to a team economist, saying, "I'm fearful of these markets. ... As we discussed it may not be a meltdown for the general economy but in our world it will be. Wall Street will be hammered with lawsuits."

The complaint alleges violation of security laws and seeks an unspecified fine.

Cioffi's attorney declined comment on Thursday.

The fallout from defaults on U.S. 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 $20 billion in assets before crashing.

Cioffi and Tannin 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 percent through June 2007 -- when "in reality, the portfolio's asset values were plummeting."

Last month, Bear Stearns shareholders approved JPMorgan Chase & Co.'s $2.2 billion buyout at about $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 $171 a share.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)

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