Overseen by Mr. Cioffi, a well-regarded executive with more than 22 years of experience at Bear Stearns, the funds were in essence a symbol of the frenzy and greed that characterized the booming subprime mortgage market from 2003 through 2006. The funds were highly leveraged, in some cases borrowing as much as $20 for every dollar invested and were sold to Bear’s most exclusive clients.

Through 2006, the High Grade fund did well, gaining as much as 40 percent in one year. In August, to satisfy demand from clients, Bear started a second fund at what would prove to be the top of the market.

According to the indictment, Mr. Cioffi and Mr. Tannin became aware of the funds’ difficulties in March. Mr. Cioffi gathered his team and led a vodka toast in celebration of their overcoming a rocky February. But as the markets got worse, Mr. Tannin became increasingly worried about the funds’ exposure to securities backed by subprime mortgages.

Mr. Cioffi calmed him: “We are not 19 year olds in Iraq,” he said in an e-mail message that was part of the indictment. But his own worries were growing. After a bad March, he told a colleague, “I’m sick to my stomach over our performance in March.”

The indictment claims that the two men hid their concerns from investors, lenders and even Bear’s own brokers. “We have an awesome opportunity,” Mr. Cioffi said to a Bear Stearns broker. Mr. Tannin congratulated himself: “Believe it or not I’ve been able to convince people to add more money,” he said to a colleague.

In late March, the indictment claims that the funds’ decline prompted Mr. Cioffi to transfer $2 million out of the $6 million he had in the Enhanced Fund and put it in a less risky fund that was showing better performance.

Prosecutors claim that the move  which he never disclosed to outside investors who themselves were desperate to exit  was proof that he was putting his interests ahead of clients.