Assistant US attorney Patrick Sinclair told a Brooklyn courtroom in his opening statement: "These two defendants lied to their investors to save their multi-million dollar bonuses."
He said Mr Cioffi and Mr Tannin knew in early 2007 that the funds, which were once valued at $20 billion, were certain to collapse but continued to encourage clients to invest.
The pair have pleaded not guilty to charges of securities fraud, wire fraud and conspiracy, but may face up to 20 years in jail if convicted.
Mr Cioffi's lawyer, Dane Butswinkas, argued that his client had merely been one of the many victims of the greatest financial crisis since the Great Depression.
Susan Brune, Mr Tannin's lawyer, is due to make her opening statement today.
Earlier this week, two potential jurors were dismissed from the trial for bias, after writing comments about "bending the rules" and "wrongdoing" in relation to the case.
By Gary Cooper