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Hedge fund arrests send chill through industry

Reuters – Pictures of hedge fund managers in handcuffs being led away to face fraud charges on Thursday have sent a chilling message to the $2 trillion (1 trillion pound) industry.

The warning was clear: mind what you say in your e-mails if you are a manager and do a lot of due diligence if you are an investor.

While this is not the first time hedge fund managers have been arrested — police are searching for a convicted manager who recently faked his suicide to avoid prison — the two former Bear Stearns managers who were surrounded by a swarm of federal agents on Thursday were in a different league.

Ralph Cioffi and Matthew Tannin were called savvy managers who understood the complicated credit markets and worked for a bulge bracket investment bank that promised investors strong risk controls. Bear Stearns also had deep pockets in case something went wrong, analysts thought.

Much of the case against the two was based on e-mail traffic between Tannin and Cioffi, including one that included the prophetic line: "… the entire subprime market is toast."

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