FBI agents swooped on Ralph Cioffi and Matthew Tannin, two former Bear Stearns hedge fund managers, arresting them at their homes yesterday and making them the first Wall Street executives to be formally charged by the US Government in relation to the credit crunch.

Within hours of their arrest, the Government’s Justice Department announced that it had also charged more than 400 people, including 50 in the previous two days, in a three-month sting operation relating to cases of mortgage fraud that have collectively cost their victims an estimated $1 billion.

Mr Cioffi and Mr Tannin were led away in handcuffs from their homes in Tenafly, New Jersey, and Manhattan, respectively, processed in the FBI’s New York office and transported across the East River to a Brooklyn federal court.

Each faces nine counts of conspiracy, securities fraud and wire fraud for allegedly misleading investors over the true health of two Bear Stearns hedge funds they managed. The funds collapsed last summer under the weight of loss-making sub-prime mortgage related investments, losing about $1.6 billion of their investors’ money.

Both developments are part of a broader federal government probe, as the government responds to sustained public pressure for convictions.

The Bear Stearns charges represent the first big case against Wall Street, while the other arrests concern those players in the housing industry, such as mortgage lenders and estate agents, who have exploited the housing bubble.

Prosecutors allege that the two Bear Stearns’ executives believed that the funds were "in grave condition and at risk of collapse" as early as March 2007, but failed to communicate this to investors, according to the indictment.

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

Much of the prosecution’s case is thought to rest on an email exchange between Mr Cioffi and Mr Tannin.

Robert Mintz, a former federal government prosecutor who now runs the white-collar division of McCarter & English, the US law firm, said: "This is a very significant test case. The charges show that the US government is determined to prosecute Wall Street wrongdoers. But sub-prime mortgages are so complicated and Wall Street’s behaviour may be found to have been so systemic, that it could be difficult to secure a conviction."

"Proving that they knew they were wrong, but covered it up, rather than that they simply got it wrong, could be difficult," he added.

A successful conviction would prompt a flurry of similar cases, while an acquittal would probably put an end to these kind of cases against Wall Street executives, Mr Mintz said.

Susan Brune, a lawyer for Mr Tannin, said: "He is being made a scapegoat for a widespread credit crisis. He looks forward to his acquittal."

Edward Little, Mr Cioffi’s lawyer, said that "we are shocked and disappointed" the government decided to bring against men and "look forward to the day they will be vindicated" in court.

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