(FORTUNE Magazine) – During his six years in political office, New York State attorney general Eliot Spitzer has racked up a stunning record as a champion of the little guy. He's exposed some of the worst practices on Wall Street--issues federal regulators wouldn't touch--including gross conflicts in analyst research and widespread market timing in the nation's mutual funds. In addition to achieving sweeping change (and a sterling image as a crusader), he has collected billions in fines and settlements and helped level the playing field for ordinary investors.

But in the past few weeks things have gotten a little messy. First Spitzer has been accused of letting one of the worst mutual fund offenders (Richard Strong) off easy. Now, with his suit against former NYSE chairman Dick Grasso, seeking repayment of more than $100 million in accumulated compensation, he's found himself immersed in a case he tried fervently to settle--one that's inevitably left him open to accusations of playing politics.

In fact, Spitzer's handling of these two matters offers some striking insights into his personal mission--and how he does business. The last New York prosecutor to launch a crusade to clean up Wall Street was Rudolph Giuliani, who built a career on dragging executives away in handcuffs and locking them behind bars.

But Spitzer comes at the white-knight role with a completely different approach. His goal isn't to incarcerate crooks; it's to stop crooked behavior. And his preferred method has become clear: uncover an endemic problem, apply pressure by bringing high-profile cases and generating withering public attention, then use all that leverage to produce change--almost always through negotiated settlements. Then it's on to the next issue. In truth, Spitzer operates more like a policymaker than a prosecutor--he's a reformer in Eliot Ness clothing. Call him a pragmatic populist. Spitzer puts it this way: "I'm less concerned about the last marginal case we make about fund timing than determining whether there's some larger structural issues we can tend to." (For more on Spitzer, see "Wall Street on the Run.")

The Strong case illustrates all this perfectly. Early on in the mutual funds scandal, Spitzer held out Strong Capital chairman Richard Strong as malfeasance "exhibit A" --the worst of the market-timing offenders. Strong had market-timed the very mutual funds he managed, imposing extra costs on the firm's small investors, who were told such rapid trading wouldn't be tolerated. Spitzer's investigation revealed that Strong had pocketed $1.8 million personally, making as many as 500 redemptions from his firm's funds in a single year. The AG's heated rhetoric built expectations that Strong would face criminal prosecution.

Instead, Spitzer settled last month, extracting a $60 million fine from Dick Strong, an unusual personal apology, and a lifetime ban from the financial industry. Strong's firm agreed to pay another $80 million and accepted reforms on which Spitzer insisted: cutting management fees by $35 million over five years and revamping its too-cozy board. Still, Strong ended the month way ahead: The deal cleared the way for him to sell his firm to Wells Fargo, reportedly for as much as $700 million--most of which Strong will pocket himself.

The reaction to these events included a story in the online magazine Slate, headlined ELIOT SPITZER, WIMP. But Spitzer had gotten precisely the result he wanted. While calling Strong's behavior "egregious," he knows a criminal charge would be tough to make stick--and wasn't about to waste his time and limited resources with such a fight. "Before we began our investigation," he tells FORTUNE, echoing a point made for months by defense attorneys for his fund-industry targets, "nobody had ever viewed timing as being a civil violation, much less a criminal case. We could not simply wake up one day and say we're criminalizing practices that had been known to regulators and where they'd done nothing."

On the other hand, getting into a mudfight with Dick Grasso--who's vowed to fight to the death--is precisely the kind of situation Spitzer seeks to avoid. The post-Grasso NYSE management had dumped the case in the AG's lap. Spitzer quickly concluded he had "hooks" to bring suit, because state law governing not-for-profit corporations (under which the NYSE operates) requires them to pay only "reasonable" compensation. Even so, he says, he tried hard to settle the matter, advising Grasso, through intermediaries, that "the smart thing thing to do was to write a check ... that would be an opportunity for everybody to look good and charitable, rather than avaricious and mean-spirited."

But Grasso, furious at the NYSE's treatment of him in the press, was having none of it. So Spitzer found himself forced to proceed with a case that can only give him headaches. Spitzer naturally has tried to cast the suit broadly, as an assault on excessive executive compensation. But the truth is that it's the sort of dead end he loathes--even if Spitzer wins in court, it will do nothing to force corporate boards to stop paying CEOs like pashas.

It's also a political nightmare. Spitzer named only Grasso and his closest NYSE board ally, investment banker Ken Langone (who chaired the compensation committee as Grasso's pay package skyrocketed), as individual defendants. Grasso (among others) then thundered that the AG was playing politics by excluding the rest of the board (including prominent fellow Democrat Carl McCall), which he says approved every penny he received. Spitzer replies that he merely brought the case that he uncovered--a board that had been duped about Grasso's pay by Grasso and Langone. "We have had a policy of taking no prisoners since I got here," Spitzer says. (Langone denies any deception.)

Intellectually, the New York attorney general has already moved on from both Strong and Grasso, refocusing his energies on improprieties in the insurance business. Expect a series of startling revelations, with major players dragged to the settlement table, where they're forced to embrace reforms--and, of course, expect big headlines.

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