Federal prosecutors are preparing to indict two Bear Stearns executives who ran hedge funds there that collapsed last summer in one of the earliest signs of the unraveling of the financial industry, The Wall Street Journal scoops on A1. It’s a sign of a new phase in the story: the uncovering of crimes committed in the panic of billions of dollars of losses.

The two, Ralph Cioffi and Matthew Tannin, will likely be charged with securities fraud, the Journal says, for lying to their investors that their funds, which had large investments in subprime mortgages, were in good shape when they were privately telling co-workers how worried they were about them. Cioffi even removed $2 million of his own money from his fund after the subprime bubble had popped.

There has been no indication that broader charges are being contemplated against Bear Stearns, now part of J.P. Morgan Chase & Co., or its executives. But any indictments over the two hedge funds could set a chilling precedent for other companies and executives now under investigation for alleged criminal missteps related to the mortgage-market meltdown.

The Journal says Cioffi’s and Tannin’s lies, just weeks before their hedge funds collapsed, helped erode the firm’s credibility, the complete loss of which ultimately led to the disastrous run on the bank that ended in its embarrassing fire sale to JPMorgan Chase in March (As a side note, the Journal reports on C1 that a JPMorgan executive is being held as part of a fraud investigation at a bank in Dubai).

Our feeling is there will be much more news like this in the months and years ahead. The subprime collapse hit so quickly and with such magnitude that it’s extremely likely that shenanigans took place—and are still taking place—in the panic. Indeed, the paper notes that several other major companies already are being investigated for financial crimes, including UBS, Countrywide Financial, and the bankrupt American Home Mortgage Investment.

Sales talk at troubled AIG

Left off that ignominious Journal short list is American International Group, which the paper reported earlier this month is under investigation for underestimating for months the losses on its derivatives contracts known as credit-default swaps.

Yesterday, the insurance giant, which has been racked by tens of billions in write-downs in the last two quarters, forced out its CEO Martin Sullivan and replaced him with its chairman Robert Willumstad, who implied that he may sell off some of the company’s businesses. The Journal and the Financial Times put the news on their front pages, though the Journal oddly doesn’t mention its own scoop on the AIG investigation in its story—you’ve got to look in the info box for that. Surely, this is a germane piece of information that helped deliver the board’s foot to Sullivan’s behind (which will be worth up to $50 million more with his severance package).

The FT knows that and mentions it in its page-one story and posts another full story on the angle, adding important context for its readers.

With the US real estate market still reeling, AIG has little hope of quickly bouncing back from its financial troubles. Meanwhile, regulatory probes are likely to drag on, ratcheting up the pressure on AIG to get its governance and accounting in order.

But the Journal notes that the company is actually taking a big step backward in corporate governance by leaving Willumstad as chairman, too. It separated the CEO and chairman posts three years ago at the insistence of Eliot Spitzer, who’s clearly not now in a position to beef about the lapse.

A board member notes that a new chairman would be AIG’s fourth in as many years.

Casino magnate: Delay smoothed way for China contract

The Los Angeles Times reports that billionaire casino magnate Sheldon Adelson won a Chinese gambling contract in 2001 after getting then House Majority Whip (and Jack Abramoff crony) Tom DeLay’s assurances that a move to oppose China’s bid for the Olympics wouldn’t be allowed to come up, according to court testimony in a Las Vegas civil suit. DeLay was one of the fifty-two co-sponsors of the bill.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.