One of two former Bear Stearns managers indicted for fraud over the collapse of hedge funds in 2007 feared a blow up risk to investors as early as November 2006, according to an email released on Thursday.

The email by fund manager Matthew Tannin was cited by prosecutors in a letter to the judge presiding over the trial of Tannin and colleague Ralph Cioffi starting on Tuesday. It was written in his diary on a private gmail account that has been the subject of intense argument between prosecutors and defense lawyers.

As I sat in John's office I had a wave of fear set over me that the fund couldn't be run the way that I was 'hoping', Tannin wrote on November 23, 2006, referring to his then superior John Geissinger at Bear Stearns. And that it was going to subject investors to 'blow up risk'.

Emails are central to the prosecution's case and several emails written by both men were cited in the June 2008 indictment. The government accused the pair of promoting their funds, which were crammed with risky subprime mortgage backed securities, while privately expressing fears in emails of a market calamity.

Prosecutors obtained a CD-ROM disk from Google Inc this week of Tannin's emails from November 20, 2006 through August 12, 2007. The two funds collapsed in June 2007.

Cioffi, 53, and Tannin, 48, were indicted for fraud, and Cioffi also was charged with insider trading, the first managers accused of criminal charges from a company that collapsed in the financial crisis.

Both face up to 20 years in prison if convicted.

The hedge funds' failure cost investors $1.4 billion. Less than a year later in March 2008, Bear Stearns Cos also collapsed. It was bailed out by the government and then sold to JPMorgan Chase & Co.

Spreads are tight and credit is only deteriorating, Tannin's November 23, 2006 email said. I was worried that this would all end badly and that I would have to look for work.

U.S. District Court Judge Frederic Block ruled on Thursday that prosecutors will not be allowed to suggest to the jury that they believe Tannin and his counsel tried to hide the gmail evidence.

Block, in a sometimes heated hearing days before trial, also ruled that defense lawyers may not tell the jury that the contents of Tannin's gmail account were voluntarily turned over.

We are going to try this case on the merits of the case, the judge said.

If you don't have enough evidence in these 500 exhibits and 38 witnesses against these people then maybe you shouldn't be successful, Block told prosecutors.

Prosecutors said Tannin deleted his gmail account with Google on the advice of his lawyers but his attorney said he closed the account and that the contents had been preserved.

The U.S. Attorney's office has repeatedly suggested...that there was something improper, lawyer Susan Brune said in court. We have been consumed with very, very ugly briefs that impugned the name of my firm and Mr Tannin's good name.

The gmail was put on the public record after the hearing, but prosecutor James McGovern told the judge that now that they had the emails from Google we know what Mr Tannin was trying to put out of reach of the government.

Jury selection starts on Tuesday with opening arguments expected later in the week. The trial is expected to last five to six weeks.

The case is U.S. v. Cioffi and Tannin 08-415 in U.S. District Court, Eastern District of New York (Brooklyn)

(Reporting by Grant McCool; editing by Carol Bishopric)

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