Noting that hedge fund managers are essentially salesmen, "anyone who expects a salesman to tell them the truth all the time is a fool," says Peter J. Henning, a professor at Wayne State University Law School and the founding editor of the white-collar crime professors' blog. He says that prosecutors have a difficult road ahead of them.

"The whole idea behind hedge funds is that these are very sophisticated investors," he says. "Is there enough to show intent to defraud? That's not easy."

This is the first criminal case to come out of the collapse of the subprime-mortgage market and the resulting credit crisis. It comes amid a nationwide effort by the Justice Department and other federal agencies to crack down on abuses in the mortgage business, an effort called Operation Malicious Mortgage.

And the indictment gives a look at the behind-the-scenes scramble at the hedge funds before the blowup. The hedge funds were the first major Wall Street casualties of the collapse in the subprime-mortgage market, and the reverberations of the funds' implosion haunted the Street for months. Less than a year later, Bear Stearns itself no longer existed, swallowed up by J.P. Morgan Chase in an emergency takeover backed by the Federal Reserve in March.

On April 22, Tannin sent an email to Cioffi from his personal account to the personal email accounts of Cioffi's wife and another manager of the funds, recommending that they either shut down the funds or significantly change their investment strategies.

Tannin wrote: "The subprime market looks pretty damn ugly…. If we believe the [C.D.O.'s report is] anywhere close to accurate I think we should close the funds now. The reason for this is that if [the C.D.O. report] is correct, then the entire supbrime market is toast…. If AAA bonds are systematically downgraded, then there is simply no way for us to make money—ever."

The indictment says that the two men "never disclosed the gravity of the funds" to investors or to more senior management at Bear Stearns.

On April 25, 2007, just days after his email, Tannin told investors in the funds that "from a structural point of view, from an asset point of view, we're very comfortable with exactly where we are."

The Securities and Exchange Commission, which has sued the two managers, contends in its complaint that Cioffi "falsely told investors" during the conference call that the funds had only a couple of million dollars in scheduled redemptions. In fact, they had $110 million.

In June, the funds, which had aggressively invested in collateralized debt obligations and other securities tied to subprime mortgages, collapsed. The funds once had more than $20 billion in assets. 

Much has been made, both in the indictment and at the news conference, that the two defendants touted their "skin in the game" to investors—meaning that they had their own money on the line. Cioffi, for one, withdrew $2 million of his $6 million and "failed" to inform investors, including the largest investor in the fund, who sought to redeem his $57 million investment on April 18, 2007. 

"They are trying to make it a disclosure and greed case," Henning said of the charges. And he believes that is their best bet, given that the valuation of instruments such as the collateralized dept obligations in this fund are extremely complex. The plummeting of those values is at the heart of the funds' collapse. But therein lies the rub: "If it becomes a valuation case, the prosecutors lose," Henning says.

The complaint is riddled with economic motives on the defendants' part. At one point last March, there was a "vodka toast" because the funds had "averted disaster." But Cioffi "directed those present" not to talk about the difficulties with others—including other members of the funds' team.

The reference to the vodka toast suggests to Henning that prosecutors have a cooperating witness. "They didn't give us a brand, but someone at that meeting talked," he says. Whether that will be enough, he is not so sure.

Cioffi and Tannin were arraigned this afternoon, appearing just after a defendant in a drug case, who appeared in blue prison togs and has been in custody for a year, and another defendant, this one in beige prison togs, appeared in connection with this court detention.

Cioffi was released on a $4 million bond, secured by his homes in Tenafly, New Jersey, and Naples, Florida, while Tannin's $1.5 million bond was secured by his apartment on West End Avenue in Manhattan.

The clock on their right to a speedy trial has been suspended until July 18 while their lawyers sort out what U.S. Magistrate Steven Gold called a "complex case."