A federal jury in New York has found two former Bear Stearns hedge fund managers not guilty of fraud charges, reports The Am Law Daily.

The jury found that Matthew Tannin and Ralph Cioffi did not lie to investors in painting a rosy picture of the health of two funds backed by subprime mortgages which later collapsed and cost investors $1.6bn (£960m).

The jury also acquitted Cioffi on an additional charge of insider trading, as prosecutors had accused the former portfolio manager of moving $2m (£1.2m) he had invested in one of his failing funds to a less risky fund while telling investors he was adding to his position.

The fraud charges were the first against high-profile Wall Street executives to be brought by federal prosecutors during the current financial crisis. The Justice Department had sought to portray Cioffi and Tannin as the latest examples of Wall Street excess.

During a month-long trial, prosecutors relied on a series of emails that they alleged revealed behind-the-scenes alarm at the hedge funds as investments in complex, high-risk securities tied to the subprime market began to slide.

Defence lawyers sought to convince the jury that the emails were taken out of context. Cioffi and Tannin, they said, had no motive to steer investors off a cliff, and were honest with them about the volatility of the market.

After the verdict, some jurors told reporters that they concluded the evidence against Cioffi and Tannin was flimsy and contradictory. Other suggested the pair were being blamed for market forces beyond their control, with one claiming they were "scapegoats for Wall Street."

"With this verdict the jury clearly rejected the government's claims that these defendants knowingly misled their investors," said Robert Mintz, a former federal prosecutor and head of the government investigations and white-collar defence group at McCarter & English. "Jurors seem to have found that the US Government was trying to hold these defendants unfairly 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."

"We are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict," said a statement by Brooklyn US Attorney Benton Campbell.

Cioffi was defended by lawyers from Washington litigation firm Williams & Connolly and New York's Hughes Hubbard & Reed, while Tannin turned to counsel from New York's Brune & Richard.

This article first appeared on The Am Law Daily blog on americanlawyer.com.