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Two former Bear Stearns Cos. hedge fund managers were acquitted of fraud charges Tuesday, a setback to government prosecutors that could make them less aggressive in trying to root out Wall Street wrongdoing.

In the first case against players in the U.S. subprime mortgage meltdown that contributed to the world financial crisis, a jury in U.S. District Court in Brooklyn, New York, found hedge fund managers Ralph Cioffi, 53, and Matthew Tannin, 48, not guilty after less than six hours of deliberations.

“I'm happy,” Mr. Cioffi said, as the families of both men shed tears of relief after the verdict was read.

Mr. Tannin left the courthouse smiling broadly with his wife at the side. “This has been a tremendous team effort. We are thrilled for Matt and for his family,” his lawyer Susan Brune said.

The verdict in the month-long trial is a blow for prosecutors and could have implications for government investigations of possible wrongdoing at other companies at the center of the global financial crisis, including bailed-out giant insurer American International Group Inc. and the bankruptcy of Lehman Brothers Holdings Inc.

The prosecutors in the case declined immediate comment.

“The government never provided enough evidence to convict them,” the jury forewoman said.

“We never found anything beyond a reasonable doubt,” another juror said.

Mr. Cioffi and Mr. Tannin were indicted in June 2008 on charges of securities fraud, wire fraud and conspiracy, one year after two funds they managed failed, costing investors $1.6-billion (U.S.).

The government also charged Mr. Cioffi with insider trading and the jury decided he was innocent of that charge as well.

“The government clearly will need to rethink whether and when to assert criminal responsibility in connection with the financial meltdown,” said Jacob Frenkel, former SEC enforcement lawyer and now a partner at Shulman, Rogers, Gandal, Pordy & Ecker.

Bear Stearns collapsed in March 2008, several months after the funds' failure, and was sold to JPMorgan Chase & Co. in a government-brokered fire sale.

“This suit was very complicated and future suits will be, too, and they'll be hard to win. It's always easy to blame Wall Street for losses, but poor judgment and management are not yet a prosecutable crime,” said Matt McCormick, a portfolio manager at Bahl & Gaynor in Cincinnati.

One professor agreed that it is up to the prosecution to show that the law was indeed broken.

“It sends a strong message to prosecutors that they need to be able to prove their case. Just losing money in and of itself is not a crime.” said Jim Angel, associate professor of finance at Georgetown University's McDonough School of Business.