Bear Stearns target of criminal probe: Report

NEW YORK (CNNMoney.com) -- The U.S. attorney in Brooklyn is investigating the collapse of two mortgage-related Bear Stearns hedge funds whose failure this summer cost investors an estimated $1.6 billion, according to a published report.

The Wall Street Journal reported the probe, which it said is in the early stages and has yet to generate subpoenas.

The collapse of the two funds hammered Bear Stearns (Charts, Fortune 500) in the most recent quarter, causing operating earnings per share to plunge to $1.16, well below the forecasts of $1.78 a share and even farther below the year-ago results of $3.02 a share.

The collapse of the funds affected other Wall Street firms that made loans to the firm backed by the funds assets, including Merrill Lynch (Charts, Fortune 500), JP Morgan Chase (Charts, Fortune 500), Citigroup (Charts, Fortune 500), Goldman Sachs (Charts, Fortune 500) and Bank of America (Charts, Fortune 500).

The paper said that while Bear Stearns was already facing a Securities and Exchange Commission civil probe related to the funds' collapse, a criminal prosecution will be difficult.

"It's a tough case to make unless they have turned up some sort of malfeasance," Christopher Clark, a former federal prosecutor turned defense attorney, told the paper. "The law assumes the investors are sophisticated and understand the risks. This was clearly a high-risk investment strategy."

The company announced layoffs of more than 300 workers in its mortgage operations Wednesday. But at an investor conference Thursday CEO Jimmy Cayne said he was confident the firm would weather this summer's credit crisis and work to expand its franchise.