Albany, N.Y. ? When New York Atty. Gen. Eliot Spitzer talks, Merrill Lynch & Co. listens courtesy of an 81-year-old state securities law that gives him huge influence over the nation’s largest brokerage and its chief rivals.

As the two sides negotiate a deal to resolve alleged conflicts of interest among Merrill Lynch stock analysts, Spitzer’s main weapon is the Martin Act, put on the books in 1921 to curb fraudulent investment advice.

The law has more teeth than federal statutes governing big Wall Street firms and other states’ securities laws because it allows New York to get convictions without proving criminal intent and without any sales or purchases of securities.

Less than two weeks after Spitzer said criminal convictions could result from his investigation into Merrill Lynch analysts, the firm agreed to disclose more details about the business relationships it has with publicly traded companies rated by its analysts.

Critics have long contended that some analysts give stocks positive ratings because the firms they work for are dependent on investment banking business arranging mergers and underwriting stock offerings from those same companies.

Now the two sides are negotiating a fine for Merrill Lynch, a payment for investors who lost money based on the stock recommendations of the firm’s analysts and larger scale reforms for its stock research division. The reforms are expected to serve as an industry model.

A settlement is virtually inevitable because Merrill Lynch “should be very concerned about the prospect that senior executives could be indicted,” said John Coffee, a Columbia University law school professor.

Also, Merrill Lynch has been taking a daily public relations beating over the investigation. The last thing the company wants is to air the case in court, Coffee said.

“They’d be front page news for a week or more and then there could be criminal indictments after that,” he said. “That is an extremely damaging spectacle.”

Spitzer already has released documents and e-mails showing that Merrill Lynch analysts privately used profanities to describe some stocks and the words “disaster” and “dog” for others while publicly issuing ratings recommending that investors buy the companies’ shares.

A large part of the investigation was focused on Merrill Lynch’s Internet division, headed by former star analyst Henry Blodget.

If the case heads to court, Spitzer would probably call on Blodget, who left the firm last year, to testify, “and Mr. Blodget would probably be advised to take the Fifth Amendment, and that would be very embarrassing,” Coffee said.

Merrill Lynch said the e-mails have been taken out of context. A top executive this week called them inappropriate, but said the firm would continue to defend its analysts’ research.

Spitzer’s use of the Martin Act to try to wring concessions from Merrill Lynch is the first time in memory that the law has been used against such a high profile company. Some observers say he’s upstaging the Securities and Exchange Commission, which has a federal mandate to oversee the securities industry.

Usually, New York prosecutors use the law to break up schemes such as “boiler room” telemarketing firms that make cold calls trying to sell stock or mortgages. Officials in other states use their laws for similar purposes, aiming to prevent a wide variety of small-scale investment fraud.

“They are generally enforcing the cases that fall beneath the SEC’s radar screen,” Coffee said.

Spitzer said he’s going after Wall Street’s giants to protect small investors who may be unaware that analysts who rate stocks work for firms that make much of their money from investment banking. His investigators have also subpoenaed records from at least six of Merrill Lynch’s main competitors, including Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co.

“All sophisticated investors the pension funds, the large private investors understood this dynamic and hence discounted the value of the research,” Spitzer said in an interview. “Smaller investors out on Main Street … don’t understand this. That’s why they are the real victims and they are the ones I have to protect.”