NEW YORK (AP) - Two former Bear Stearns managers were arrested yesterday on charges linked to the collapse of a hedge fund that bet heavily on sub-prime mortgages before the market collapsed, federal authorities said.

Matthew Tannin was taken into custody outside his New Jersey home yesterday morning and Ralph Cioffi was arrested at his New York City home, the FBI said. They became the first executives to be charged criminally in the wake of the sub-prime market debacle.

The US attorney's office in Brooklyn said it planned to announce conspiracy and fraud charges later yesterday.

In a separate but related action, the Securities and Exchange Commission (SEC) filed a complaint yesterday in Brooklyn federal court. It alleges that in the first five months of 2007, Mr. Tannin and Mr. 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, Mr. Cioffi withdrew $2 million of his own money from a hedge fund without revealing to investors that he was substantially reducing his exposure to the toxic loans.

"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.

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

A law enforcement official told The Associated Press on Wednesday that an indictment naming the men was the result of a yearlong federal securities fraud investigation.

The former executives are suspected of misleading investors about the risky sub-prime mortgage market, the official said, speaking on condition of anonymity because the outcome of the investigation is pending.

Mr. Tannin "is innocent", said his attorney, Susan Brune. "He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal."

Mr. Cioffi's attorney declined comment on Wednesday.

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.

Despite positive assessments by Mr. Cioffi and Mr. Tannin, the Bear Stearns hedge funds failed in June 2007. The funds had more than $20 billion in assets before crashing.

Mr. Cioffi, 52, and Mr. Tannin, 46, 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 six percent through June 2007 - when "in reality, the portfolio's asset values were plummeting."