Investment bankers, stock analysts and now mutual fund brokers might hate Eliot Spitzer, but the New York attorney general is beloved among lawyers.

One day after Spitzer announced a $40 million settlement with a hedge fund that engaged in illegal trading of mutual fund shares, word on the street is that Wall Street firms are scrambling again to find legal representation.

"This is a big deal and it's got everyone worried," said a corporate lawyer who represented several analysts and Wall Street executives subpoenaed during the tainted stock-research investigation. The attorney, who didn't want to be identified, said his law firm is meeting Thursday with several prospective clients concerned about where Spitzer's mutual fund inquiry may be leading.

Class-action securities lawyers also are starting to lick their lips over the prospect of another big payday.

Christopher Lovell, the lead plaintiffs' lawyer in the $1 billion settlement in the Nasdaq Stock Market price-fixing litigation, is "getting information" to determine just how widespread trading abuses are in the mutual fund industry.

Stanley Grossman, another plaintiffs' lawyer, said he's been contacted by an institutional investor about the possibility of pursuing litigation against the mutual funds and is "examining certain claims."

A source familiar with the probe said Spitzer's office is still looking into the activities of other mutual funds that reportedly did business with the Canary Capital Partners hedge fund, but weren't identified in the civil complaint filed Wednesday. Earlier in the week, Spitzer's office served subpoenas on a wide swath of mutual fund companies and Wall Street brokerages, asking them to preserve documents that could be sought at a later date.

What's scaring Wall Street is Spitzer's comments that he believes the kind of illegal trading activity his office has uncovered is widespread and could result in criminal charges against some individuals.

In the tainted research scandal, there never was any serious talk about analysts or Wall Street executives going to jail -- not even Jack Grubman, the former Citigroup analyst. That probe, which culminated in 10 Wall Street firms paying $1.4 billion in fines and restitution, was always about money.

But the allegations of illegal trading between Canary and the mutual fund companies at Bank of America ( BAC - Get Report), Janus ( JNS), Bank One ( ONE - Get Report) and Strong in the Canary complaint strike some as being far more serious than allegations that analysts touted stocks simply to get investment banking business.

Specifically, Spitzer's office found that Canary, which once claimed $1 billion in assets, boosted its returns by engaging in a pattern of "late trading" and "market timing" in mutual fund shares, all with the active cooperation of the mutual fund companies.

Late trading is a particularly egregious offense that enables a trader to purchase shares in a mutual fund after the close of the trading, but at their 4 p.m. price. Market timing, meanwhile, is an arbitrage strategy that allows savvy traders to take advantage of the time differences between the closing of the U.S. markets and foreign exchanges.

"When you boil it down, it's kind of like insider trading," said Jonathan Kord Lagemann, a New York securities lawyer. "If you get to buy tomorrow's fund at today's prices, you have information that other people don't have."

Lagemann said the complaint brought by Spitzer is the kind of prosecution the Securities and Exchange Commission specializes in. Like many securities lawyers, he expressed dismay that Spitzer once again beat the SEC to the punch.

"Where the hell has the commission been?" Lagemann said.

Mutual fund portfolio managers also aren't taking lightly the allegations of Spitzer's intent to follow through. If the allegations are true, several managers said the investigation could serve to undermine investor confidence in the mutual fund business, just at a time that small investors are beginning to come back to Wall Street.

"Late trading is just appalling, but market timing from a portfolio manager's perspective is equally appalling because it really does dilute the earnings of those who are buy-and-hold investors," said Michael Stead, a portfolio manger for Wells Capital Management's SIFE financial services fund. "You are incurring more trading costs and over time it has the potential to dilute other people's return."