Matt Tannin...is being made a scapegoat for a widespread market crisis
Attorney Susan Brune representing Mr Tannin
Two former managers at investment bank Bear Stearns have been charged with fraud related to two hedge funds which collapsed in June last year.
Ralph Cioffi and Matthew Tannin, who managed the funds, were arrested in New York and later granted bail.
It is alleged they knew of the funds' problems but did not disclose them to its investors, who lost a total of $1.4bn (£709m).
The two men pleaded not guilty at a Federal Court hearing in Brooklyn.
The hedge funds bet on the high-risk sub-prime mortgage market in the US before they collapsed.
Their closure was one of the first signs of the problems in the sub-prime market, which triggered a massive loss of confidence in financial markets.
In a separate development, more than 400 people have been arrested as part of an FBI investigation into alleged mortgage fraud.
The deputy US attorney general said the two investigations were intended to help restore stability and confidence in the housing and credit markets.
FBI spokesman Jim Margolis told the BBC the men faced criminal charges of "securities fraud related to their management of two Bear Stearns hedge funds".
Matthew Tannin (left) was arrested in New York
According to papers filed with a US District Court in New York, the two men are charged with running what is described as "a fraudulent scheme".
Mr Cioffi and Mr Tannin believed that two of the funds they ran were in "grave condition and at risk of collapse", the charges stated.
"Rather than disclosing the true state of the Funds to investors and lenders, thus allowing an orderly wind-down of the 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," the papers said.
The indictment quotes an email Mr Tannin sent to Mr Cioffi in April 2007 which stated that if a report by one of their management team was correct, "the entire sub-prime market is toast".
Two days later, according to the papers, the two men told senior Bear Stearns personnel that the Funds were "in good shape and would continue to be successful".
Attorneys representing the former Bear Stearns managers said they had not foreseen the sub-prime crisis.
"[It] took the whole financial world by surprise," said Mr Cioffi's attorney, Edward Little.
"So our question is, why is Ralph Cioffi being charged in this case?"
Mr Tannin's lawyer, Susan Brune, said he was "being made a scapegoat for a widespread market crisis".
"He looks forward to his acquittal," Ms Brune added.
Mr Cioffi and Mr Tannin are thought to be the first Wall Street executives to face criminal charges related to the US sub-prime mortgage crisis.
Their arrest could mark the start of a wider campaign by US authorities to hold to account those seen as responsible for the events that gave the world's financial markets their biggest shock since the Great Crash of 1929, according to BBC business correspondent Mark Gregory.
Sub-prime mortgages, loans issued to people with a poor credit history, were repackaged as securities and sold across the globe.
The collapse of these hedge funds preceded Bear Stearns' own demise earlier this year.
In March, JP Morgan agreed to buy Bear Stearns with the backing of the US Federal Reserve. The deal was approved by Bear Stearns shareholders last month.
Bear Stearns was one of the most high-profile victims of the credit crunch, which was triggered by bank losses linked to the US housing market.
The Fed took swift action over the situation at Bear Stearns to prevent problems spreading to the rest of the international financial sector.
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