Eliot Spitzer's lock 'em up bravado was running full throttle early this year. His office was trumpeting the arrest of Paul Flynn, a former investment banker accused of lending hedge funds some $1 billion to use in illicit trading, which scored huge profits at the expense of other investors in mutual funds.

"Our investigation has demonstrated that it took many players in the industry to make these schemes work," Spitzer said in the Feb. 3 press release, one of many that helped anoint his New York attorney general's office as the foremost enforcer of mutual fund abuse.

But five months after suggesting there is widespread fraud among the country's more than 8,000 funds, Spitzer's list of captured villains is short, a mere eight.

Flynn, formerly of

Canadian Imperial Bank of Commerce

(BCM) - Get Report

, remains the only Wall Street financier charged criminally or civilly by Spitzer in his yearlong probe. Spitzer filed criminal charges against only one broker in the fund investigation: Theodore Sihpol, formerly of

Bank of America

(BAC) - Get Report

. Former

Fred Alger Management

Vice Chairman James P. Connelly Jr. is the only fund executive to face criminal charges. And among hedge funds, only

Millennium Partners

trader Steven Markovitz has faced an indictment.

By Spitzer's own math, the ranks of unpunished scofflaws must still be large, encompassing scores of brokers, traders and money men who were the scandal's hands-on participants. But the smaller-than-expected number of arrests is only one sign that Spitzer's mutual fund campaign was like a master painter's lesser work -- impressive in form and execution, but lacking the scope that marks greatness.

His investigation has done little to seriously harm or diminish the mutual fund industry, as investors haven't pulled out noticeable sums. What's more, there remains a conspicuous lack of evidence that late trading and market timing, the illicit activities that set off the scandal, actually hurt the returns of most individual investors.

"I haven't personally seen a huge outcry," says David Moran, a senior vice president with Evensky Brown & Katz, a Coral Gables, Fla.-based financial planning firm. "It's not that retail investors don't care. It just doesn't viscerally affect them."

Indeed, Spitzer's starring role a few years ago in decrying Wall Street's tainted research is proving a tough act to follow. Back then, Spitzer could point to their embarrassing work on

Enron

and

WorldCom

, two painful scandals in which thousands of individual investors lost their investments, including their retirement funds. Conversely, the culprit in the mutual fund debacle was a pair of obscure gimmicks: late trading, the buying and selling of shares at stale prices to capitalize on late-breaking news; and market timing, a complex arbitrage strategy involving simultaneous fund transactions in different time zones. Neither was ever a candidate for much dinner table discussion.

Not that the New York attorney general didn't accomplish some important mutual fund reforms. He pried $2.4 billion in fines and restitution from some of the most trusted names in the fund business. He showed large parts of an industry, long perceived as wholesome, to be rank with the potential for abuse. If not for Spitzer, it's doubtful the

Securities and Exchange Commission

would finally be taking steps to reform the $7.4 trillion fund industry's antiquated governance structure or belatedly moving on rules designed to stamp out market timing and late trading.

"In a period of nine months we have made a huge impact on the industry,'' says Juanita Scarlett, spokeswoman for Spitzer, who declined comment for this article. "It may be happening at a pace slower than some would have hoped. But when an investigation may be criminal in nature, it has to follow a process to allow fairness to all parties.''

Post-Spitzer, mutual fund officials will also think carefully about granting anyone special trading privileges, lest they be shamed out of work as were Richard Strong of

Strong Capital Management

, Lawrence Lasser of

Putnam Investments

, and Gary Pilgrim and Harold Baxter of

PBHG

.

"

Spitzer turned over the stone," says Edward Fleischman, a former SEC commissioner and an attorney in private practice. "I'm kind of glad he raked the coals, even though some very prominent people bit the dust."

For the three fund firms most closely identified with the scandal --

Janus

(JNS)

, Putnam and

Alliance

(AC) - Get Report

-- Spitzer's probe did indisputable damage, prompting investors to pull out $24.4 billion from the funds in the scandal's first three months, according to Financial Research Corp. The trio's outflows remained $12.9 billion in the latest three months, as the companies reached settlements with Spitzer and other regulators.

As a whole, however, the business of mutual funds was never badly dented. U.S. funds received a net $189 billion in new investor money since the scandal broke in September. And while those inflows may have been inevitable following 2003's rising market, that logic ignores the more lasting damage Spitzer did in his investigation of Wall Street research, an institution whose reputation has not bounced back with stock prices.

"He did an important public service in uncovering this," says Bill Singer, a New York securities lawyer and a former NASD prosecutor. "But I also suspect the public will have a short memory. The public is too deeply invested in mutual funds."

Who lost in abusive trading? A study by the Georgia State University Robinson College of Business estimates that the typical international mutual fund lost about a half-percent a year due to market timing by hedge funds and other fast-fingered traders. But in domestic stock funds, the study found losses were negligible.

"There was a negative impact on international funds. But we did not find a significant impact on domestic funds," says Jason Greene, one of the professors involved with the study, which examined mutual fund returns from 1998 through 2000.

"We don't have specific investors who can stand up and say, 'I felt a great deal of harm because of what happened,' " says Donald Langevoort, a professor at Georgetown University School of Law. "There have been some expressions of concern, but I don't think it's an Enron type of scandal."

The Georgia State study didn't assess the impact of late trading on mutual fund investors. That's not surprising, of course, because few people outside of the shadowy world of market timers were even aware it was happening until last September, when Spitzer reached his $40 million civil settlement with the now infamous

Canary Capital Partners

hedge fund.

Nine months later, it's still not clear how much late trading -- the most headline-grabbing part of Spitzer's investigation -- was ever going on outside of Canary. To date, only three other funds have been alleged by Spitzer's office to be involved in the crime: Millennium Partners,

Samaritan Asset Management

and

Veras Investment Partners

. Almost always, it's Canary that emerges as the worst offender in each new settlement.

While regulators have advised several hedge funds to set aside money to cover the cost of a possible settlement, no hedge fund other than Canary has been sanctioned or charged in the investigation. Canary remains the prime villain in Spitzer's investigation, even though, early on, his office leaked information to the press about the numerous subpoenas he had served on the hedge fund community.

Many legal observers say if Canary's abusive trading was as bad as it now seems, Spitzer might have erred in cutting so fast a deal with the hedge fund and its founder, Edward Stern. Another problem with the Canary settlement is that so much of Spitzer's subsequent investigation has been dependent on the information provided by Stern and his cohorts. Canary's frequent appearance as public offender No. 1 may be contributing to the scandal's diminishing impact, as settlements with the fund companies increasingly reveal little but the size of the fines.

One of Spitzer's top deputies disputes that criticism, saying the office's deal with Canary was a tough one that not only included a stiff fine, but required that Stern and others provide cooperation that advanced the overall inquiry.

"Canary was a player with one of the most robust late-trading operations," says David Brown, assistant attorney general in the investment protection bureau. "The deal with Canary blew the whole thing open."

Canary's settlement might indeed be an example of efficient prosecution, in which a deal was cut with a big fish in order that other wrongdoers will line up behind. To some critics, however, it's evidence that Spitzer, an all-but-declared Democratic candidate for New York governor in 2006, cared too much about producing quick headlines -- particularly when the scandal was fresh in people's minds.

Those headlines came fast and furious when the scandal broke, helped by press releases from Spitzer's office describing an "egregious" and "complicated fraud" that would result in jail time for violators. Nine months later, his office has either filed criminal charges against or secured guilty pleas from eight people, none of them well-known.

No fund company implicated in the probe has been put out of business or ordered to sell its funds to another manager. The only outfit Spitzer pushed to close,

Security Trust

of Phoenix, was a little-known trust bank that permitted hedge funds such as Canary to place late trades in dozens of mutual funds. (Three of the people charged in the probe worked for Security Trust.)

The ability of brokers to stay out of Spitzer's sights is particularly galling to defense lawyers with clients in the probe's better-publicized sectors.

"The brokerage companies encouraged this," says a criminal defense lawyer who represents several people implicated in the investigation. "Many brokerages had market-timing desks set up."

Indeed, in the immediate aftermath of Spitzer's announcement last September that he had uncovered a plot involving hedge funds to game the mutual fund system, several big Wall Street firms fired or suspended scores of brokers who had been involved in arranging market-timing trades for their customers. But Spitzer has yet to take action against any of these middlemen, some of whom have moved to others brokerages or are living off their ill-gotten riches.

A prime example of the latter is Michael Sassano, an

Oppenheimer & Co.

(OPY) - Get Report

broker whose A-list of hedge fund-timing clients enabled him to gross $15 million in annual commission at the height of his market-timing prowess. Spitzer is one of several regulators investigating Sassano, who is on leave from Oppenheimer. But people who know Sassano, who had so much "timing" business that he often referred customers to his friends at rival brokerages, say the inquiries are causing him few sleepless nights, as he jets between residences in south Florida, the French Riviera and Moscow.

Looking back, it's apparent that Spitzer decided to focus most of his efforts on the mutual fund families, leaving investigations of the brokers and hedge funds to others. His victims in that arena, however, have been singularly well equipped to deal with their punishments.

The scandal may have driven Lasser out of the chief executive's office at Putnam, but he still walked away with $78 million in deferred pay owed to him by Putnam's parent,

Marsh & McLennan

(MMC) - Get Report

.

Strong paid a $60 million fine to settle charges he market timed his own funds, thereby avoiding criminal charges. Almost simultaneously with word of the settlement,

Wells Fargo

(WFC) - Get Report

agreed to pay an estimated $500 million to buy the mutual fund company Strong founded and still owns 85% of.

Spitzer's biggest prosecutorial success is the enormous settlements and fee reductions he's won from the fund families. But while the fines may look huge, they can hardly be considered unmanageable when weighed against the billions of dollars in earnings most financial companies generate each quarter. Moreover, hefty fines are a poor substitute for jail time as a deterrent for bad acts -- a point commentators often have made about the corporate accounting scandals at Enron, WorldCom and

Adelphia

.

The settlement hammered out with Bank of America is a good example of the limitations of Spitzer's pocketbook justice. The $375 million pact is the biggest announced to date in the inquiry, and rightly so, since Bank of America was one of the most egregious players in the mutual fund scandal. The bank's brokerage arm set up a special trading platform to permit Canary, among others, to place sure-thing bets on mutual funds after they had been priced at the 4 p.m. close. Its actions were bad enough to compel the resignation of eight directors in its mutual fund arm and chase the bank from the stock-clearing business.

Yet as bad as Bank of America's conduct was, Sihpol, who is awaiting trial, remains the only person from the bank facing criminal charges -- even though there's evidence he didn't work alone. The bank, early on, fired at least three other employees, including Sihpol's supervisor. Additionally, a former investment adviser has told

TheStreet.com

that a salesman in BofA's brokerage arm -- someone other than Sihpol -- approached him early last year about installing a trading platform similar to the one used by Canary. The investment adviser says he rejected the idea.

In the settlement, the BofA's mutual fund operation was ordered to make some corporate governance changes, but the business is on the rebound. While Spitzer might believe that a single rogue broker masterminded bad deeds worth a combined $375 million, critics say it's more likely he simply saw no need to pursue further convictions after getting the big fine -- and all the headlines.

Even factoring in the cost of the settlement, Bank of America earned $2.68 billion in the first quarter of 2004, up from $2.42 billion a year earlier.

"The firms are buying peace," says Jonathan Kord Lagemann, a securities attorney and former Wall Street general counsel. "There's no other reason to pay hundreds of millions of dollars, and Spitzer has sure figured that one out. I'm surprised by how much they paying, but you want him to go away.''

Spitzer's defenders say the criticism that he's tackled only part of the problem is unfair and premature. They point out that mutual funds were the prime target because that's where 95 million Americans invest their life's savings. His supporters say an investigation as far-reaching as the mutual fund trading scandal takes time to unfold, especially when there are criminal implications to some of the activities. They say it's too soon to close the book on Spitzer's prosecutorial scorecard.

Others worry investigators' commitment to the scandal has ebbed as investors have lost interest and gone back to worrying about whether

Cisco

(CSCO) - Get Report

,

Amazon

(AMZN) - Get Report

and

Lucent

(LU)

will make their quarterly numbers.

"I don't know where all this is leading,'' says Singer, the securities lawyer. "Is he just making a name for himself and moving on? The industry likes to paint him as an opportunist. To some extent, that remains to be seen. But is Spitzer going to offer long-term meaningful reform, or is this all just a photo op?"