The two men were charged with misleading investors about the health of two Bear Stearns hedge funds whose implosion ignited the sub-prime mortgage crisis. Mr Cioffi was also charged with insider trading in the indictment, which cites a series of emails between the two men. They both face as much as 20 years in prison if convicted of conspiracy, and Mr Cioffi faces an additional 20-year term if found guilty of insider trading.

The US government has been investigating possible fraud by banks and mortgage firms whose investments in sub-prime loans and securities plunged in value, causing losses that now total $396.6 billion. Mr Cioffi and Mr Tannin were also sued today by the Securities and Exchange Commission, the US financial regulator.

Mr Cioffi was arrested at his New Jersey home. Mr Tannin was arrested at the same time at his Manhattan apartment, said the Federal Bureau of Investigation.