Two former Bear Stearns fund managers, who were acquitted of criminal charges over the demise of their mortgage-laden hedge funds, agreed on Monday to pay more than $1 million to resolve a civil lawsuit brought by market regulators.

The settlement with the U.S. Securities and Exchange Commission was announced on the day a trial on the lawsuit was scheduled to begin in Brooklyn, New York.

Ralph Cioffi and Matthew Tannin were found not guilty of all charges in 2009 in a parallel criminal case brought by the U.S. Department of Justice. The jury rejected prosecutors' arguments that the two men committed fraud by lying to investors about the health of their hedge funds, which were stuffed with securities backed by risky home loans. The funds imploded in mid-2007.

It was the first high-profile criminal prosecution of Wall Street executives stemming from the 2008 financial crisis, and the acquittals were a big blow to the government.

U.S. District Judge Frederic Block must sign off on the proposed settlement with the SEC, which was approved by the agency's commissioners at a meeting last week.

Block told lawyers for each side that he was inclined to approve the deal. But he criticized the proposed penalties as chump change compared to the $1.8 billion that the SEC says was lost by Cioffi and Tannin's investors when the two hedge funds collapsed.

SEC lawyer John Worland told Block he thought the deal was a good one, given that the agency is not authorized to sue for damages on behalf of investors.

The judge also chastised the parties for waiting until the last minute to reach a deal in a case that has been pending since 2008. Block said he had set aside three weeks for the trial, which would have covered much of the same ground as the criminal case.

Lawyers for Cioffi and Tannin declined to comment.

Under the settlement, Cioffi will give up $700,000 of profits and pay a civil penalty of $100,000; Tannin will give up $200,000 of profits and pay a $50,000 civil penalty.

Cioffi will be barred from working in the securities industry for three years, while Tannin will be barred for two years,

The men are not admitting or denying wrongdoing, lawyers said.

Lawyers for the two sides said the settlement is centered on a charge that the defendants committed securities fraud through negligence, which does not require either side to address whether the defendants intended to defraud or deceive their clients.

Bear Stearns, on the verge of failure because of losses on mortgage-related investments, was acquired by JPMorgan Chase & Co in March 2008.

The case is SEC v . Cioffi, in the U.S. District Court for the Eastern District of New York, 08-2457.

(Reporting by Jessica Dye; Editing by Martha Graybow, Steve Orlofsky and John Wallace)

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