Former Bear Stearns execs not guilty

Former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin were found not guilty on all charges on Tuesday.

NEW YORK (CNNMoney.com) -- Two former Bear Stearns hedge fund managers were found not guilty on all charges on Tuesday in the first major criminal trial stemming from the housing and financial meltdown.

A jury in U.S. District Court in Brooklyn, N.Y., acquitted Ralph Cioffi and Matthew Tannin. Both had worked as hedge fund managers at Bear Stearns, which went bankrupt in March 2008.

"I am grateful for the jury's hard work in weighing all the evidence and thank them for their commitment to finding the truth," said Tannin in a statement.

Federal prosecutors had accused Cioffi and Tannin of falsely inflating the value of their portfolios, even as they knew that the mortgage-backed assets in the funds were at risk of collapse.

"Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict," U.S. Attorney Benton Campbell said in a statement. "Honesty and integrity are the [principles] upon which our financial markets function. Enforcing and protecting those [principles] will continue to be one of the principal efforts of this office."

The fund managed by Cioffi and Tannin failed in June 2007, and $1.6 billion of investors' funds were lost. The government charged both men of securities fraud, wire fraud and conspiracy. Cioffi was also charged with insider trading for allegedly moving $2 million of his own money out of a poorly-performing Bear Stearns fund and into a separate fund that he oversaw.

If they had been convicted, each faced sentences of 20 years in prison. Cioffi faced an additional 20 years on the insider trading charge.

The prosecution had accused the two executives of repeatedly lying to investors about how much of their own money they had put into the funds. Cioffi and Tannin also allegedly lied about how many other investors had taken their money out of the funds.

But the defense said Cioffi and Tannin may have been overly enthusiastic about the funds' performance, but there was no conspiracy. The defense argued that the two former managers had no way of knowing what lay ahead in the subprime mortgage market. As the housing bubble burst in 2007, assets backed by subprime mortgages tumbled in value.

White collar crime experts said the U.S. Attorney was unable to convince the jury that the defendants willingly and purposefully committed fraud.

"With this verdict the jury clearly rejected the government's claims that these defendants knowingly misled their investors," said Robert Mintz, former federal prosecutor and current partner with McCarter & English.

"While prosecutors argued that the case was about lying to investors, jurors seem to have found that the government was trying to unfairly hold these defendants responsible for predicting the impending collapse of the economy at a time when even economists were uncertain as to where the world markets were headed."

The month-long trial was viewed as a barometer for future investigations of possible fraud at other firms that may have exacerbated last year's financial meltdown. Former executives at bailed out insurer AIG (AIG, Fortune 500) and bankrupt investment bank Lehman Bros. are reportedly under investigation.

"Everyone has been looking to the Bear Stearns case to gauge how a jury would react," said Matthew Levine, Former Assistant U.S. Attorney in the Eastern District of New York.

"These cases take time to develop, but it's still a really tough political climate out there -- people want blood."

--CNN's Ekin Middleton contributed to this story