Two former hedge fund managers at investment bank Bear Stearns defrauded investors by concealing problems that led to the $1.4 billion collapse of funds linked to subprime lending, a federal indictment unsealed on Thursday charged.

The indictment by a New York federal grand jury also said the two, Ralph Cioffi and Matthew Tannin, touted the funds as an "awesome opportunity" to investors as they were privately discussing grave concerns over the prospects of two funds they managed.

The two were charged with eight counts of wire and securities fraud in the highest profile case brought to date in connection with the collapse of the subprime lending industry. Cioffi also was charged with insider trading.

The indictment says the two also concealed the funds' problems from their superiors at Bear Stearns.

Their lawyers said they were innocent.

The indictment said, "Starting at least by March 2007, Cioffi, Tannin and others believed that the funds were in grave condition and at risk of collapse.

"Rather than disclosing the true state of the funds to investors and lenders, thus allowing an orderly wind-down of the funds, Cioffi and Tannin agreed to make representations in the ultimately futile hope that the funds' bleak prospects would change and that their incomes and reputations would remain intact."

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