The sub-prime mortgage crisis has thrown up its first high-profile arrests as two former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin were taken into custody at their homes this morning over their roles in the collapse of two funds that ignited the financial crisis last year.

Matthew Tannin was taken into custody outside his New Jersey home on Thursday morning and Ralph Cioffi was arrested at his New York City home, the Federal Bureau of Investigation (FBI) said.

The two men were processed at FBI headquarters in Manhattan, and then taken out in handcuffs by six FBI agents to be transported across the East River to Brooklyn federal court for an appearance later today in connection with an indictment. The US attorney's office in Brooklyn said it planned to announce conspiracy and fraud charges later Thursday.

They are accused of committing fraud by falsely telling investors the funds they managed were in good condition. ''The arrests are appropriate given the magnitude and the egregiousness of their alleged misconduct,'' said attorney Steven Caruso, who is representing investors in arbitration claims against the funds. Cioffi and Tannin engaged in a ''gross violation of the public trust.''

Tannin "is innocent," said his attorney, Susan Brune. "He is being made a scapegoat for a widespread market crisis. He looks forward to his acquittal." Cioffi's attorney declined comment.

The arrests are the first from a federal probe of 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.

Cioffi was a senior portfolio manager of the two funds that collapsed and Tannin served as his chief operating officer. The hedge funds invested almost all of their assets in sub-prime-mortgage-related securities. Their investment bets failed last June when prices for collateralized-debt obligations, called CDOs, linked to loans plummeted amid rising late payments by borrowers with poor credit histories or heavy debt.

The prosecution has reportedly got hold of an e-mail allegedly sent by the two suggesting that their funds were headed for trouble, four days before they told investors they were comfortable with their holdings. In that mail, Tannin allegedly told Cioffi he was afraid that the market for bond securities they had invested in was ''toast,'' and suggested shutting the funds, which didn't happen, leading to billions of losses for the investors.

The collapse of the hedge funds foreshadowed Bear Stearns' own demise, with the Federal Reserve having to intervene earlier this year to bail out the beleaguered bank. Their collapse revealed how much damage had been done to the companies that bought, repackaged and sold the loans.

The arrested duo have already have been named in lawsuits brought last year by hedge fund investors, including Barclays Bank PLC, who allege they were purposely misled.

Barclays accused Bear Stearns of knowing for months that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth "far less" than their stated values.

The bank alleged Bear Stearns managers "hatched a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments."