Two Bear Stearns hedge fund managers accused of lying to investors as the subprime mortgage crisis first exploded two years ago were acquitted of criminal charges Tuesday.

The acquittals are likely to put a damper on future criminal prosecutions of executives in connection with the worst financial crisis since the Great Depression, experts said.

“When prosecutors lose a somewhat-precedent-setting case like this it certainly makes them less willing to devote resources to similar cases,” said Jay Ritter, a finance professor at the University of Florida.

Ralph Cioffi and Matthew Tannin, both senior executives at Bear Stearns, were the first high-profile banking executives to be charged criminally in connection with the economic meltdown following the collapse of the U.S. housing market.

Prosecutors said the alleged fraud cost 300 investors about $1.6 billion and nearly caused the demise of Bear Stearns itself. The firm barely avoided bankruptcy via a government-aided fire sale to  JPMorgan Chase (JPM).

Jurors deliberated for two days before finding Cioffi and Tannin not guilty of conspiracy and other charges. The trial lasted a month.

Both men had been charged with three counts of securities fraud and two counts of wire fraud. Cioffi was also charged with insider trading.

Tannin left the courtroom without comment. Cioffi said only, "I'm happy," according to the Associated Press.

Prosecutors based their case on a series of e-mails they alleged revealed behind-the-scenes alarm at Bear Stearns as investments in complex, high-risk securities tied to the subprime market began to slide.

“The subprime market looks pretty damn ugly,” Tannin wrote to Cioffi in April 2007. If Bear’s internal reports were accurate, Tannin suggested, “I think we should close the funds now,” and “the entire subprime market is toast.”

The situation became so dire that Cioffi pulled $2 million of his own cash from the fund, but the pair still told investors that they should stay in and that the outlook was good, prosecutors said. He also was accused of hiding news that one worried investor had decided to pull out $57 million from the funds.

Based on a credit analysis, “there's no basis for thinking this is one big disaster,” Cioffi told investors in a recorded conference call with investors that was played for jurors.

The defendants “lied to their investors. They defrauded their investors. They misled their investors,” prosecutor James McGovern said in his closing argument. “And it's time for them to be held accountable.”

Defense attorneys sought to convince the jury that the e-mails were taken out of context. Cioffi and Tannin, they said, had no motive to steer investors off a cliff, and were honest with them about the volatility of the market.

Prosecutors failed to show that the managers “knew what the future held and they hatched a criminal scheme to lie to investors,” Cioffi's attorney, Susan Brune, countered in her closing arguments.

Added Brune: “This is a case that is built on hindsight bias.”

Ritter said defense attorneys apparently made a strong case that Cioffi and Tannin shouldn’t go to jail for misreading the depth of the subprime crisis.

There are “legitimate disagreements” as to how the financial crisis played out over the past two years, Ritter noted. He cited the situation in March when many thought the U.S. was heading into another Great Depression. But, in hindsight, it seems the downturn at that point may have created "a great buying opportunity," he said.