Former Bear Stearns Mortgage Fund Managers Arrested

Federal officials arrested two former hedge fund managers from once high-flying Bear Stearns Cos. on Thursday morning, in a very public display by officials from the Federal Bureau of Investigation’s New York office.

Both Ralph Cioffi and Matthew Tannin were taken into custody at their homes, and processed at FBI headquarters in Manhattan; both men were then escorted in handcuffs by six FBI agents to Brooklyn federal court for a hearing scheduled later today. The so-called “perp walk” into court lead to veritable news photograph frenzy, as well, according to media sources that spoke with Housing Wire Thursday morning.

Various news reports had suggested earlier that criminal indictments for both men were pending and could lead to arrests sometime this week.

The two Bear Stearns funds in question, managed by both men — the High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund — were the first two major hedge funds to implode amid a burgeoning mortgage and credit crisis that has still yet to fully work its way through the global financial system. See HW coverage of the funds’ blow-up by clicking here.

The funds’ trouble in June of last year were the first in a series of difficulties that helped push Bear Stearns to the brink of insolvency, leading to its bailout arrangement with JPMorgan Chase & Co. (JPM: 41.17 +3.96%) and the Federal Reserve in May of this year.

The Wall Street Journal suggested that the criminal charges center on whether both Cioffi and Tannin hid their concerns from investors as troubles mounted in the structured credit market late last year, citing a series of emails between both managers. Sources suggested to HW that there would likely be more than that evidence in the formal indictments, which have not yet been unsealed and released to media.

Cioffi also quietly transferred $2 million of his own $6 million investment into one of the funds elsewhere in March, while telling clients that all was okay and failing to disclose the activity, the Journal reported.

“I doubt you’d see criminal indictments on the basis of a few emails of managers discussing their market concerns,” said one source, an attorney in Washington, D.C. that asked not to be identified by name. “There’s got to be more, or this could be a very weak case.”

Lawyers for both Cioffi and Tannin have said their clients are being made into scapegoats for a wide-ranging and multi-faceted credit crisis.