NEW YORK (CNN/Money) - Merrill Lynch said Wednesday it has retained former New York Mayor Rudolph Giuliani to negotiate with state Attorney General Eliot Spitzer, who has been weighing whether to bring criminal charges after a 10-month investigation of the nation's largest brokerage house.

Giuliani, who first made his mark as a Wall Street-bashing prosecutor in the 1980s, is expected to advise Merrill on all aspects of a possible settlement with Spitzer, who claims that Merrill analysts, including former Internet guru Henry Blodget, knowingly issued misleading stock ratings.

Already, Giuliani has given New York-based Merrill legal analysis and placed a call to Spitzer just before Spitzer released the results of his investigation, the Wall Street Journal reported Wednesday.

Former NYC Mayor Rudolph Guiliani (CNN/file)

"The reality is that Merrill is an enormously important player in New York in the right sense," Giuliani told the Journal. "There is a problem here; no one is running away from that. We should try to find a solution that corrects it and that really requires more than one player, not just one attorney general taking action. That was the point I was trying to make with Eliot.''

Spitzer claims that Merrill analysts issued top ratings for companies they believed were bad investments in order to please the firm's investment banking clients. Merrill last week agreed to disclose its investment banking relationships on a Web site, complying with a court order Spitzer obtained requiring disclosure of possible conflicts of interest between the brokerage's research and banking arms.

On Tuesday Spitzer announced he was forming a multi-state task force to investigate possible securities fraud committed by brokerages.

"The issues presented in this matter are complex and require comprehensive understanding of the market system," a Merrill Lynch spokesman told CNNfn. "Giuliani has an extensive background in this area and has demonstrated his skills as an innovative problem solver and effective negotiator."

The stakes in the case are high. One Wall Street analyst said Wednesday that Merrill could face a payout of up to $2 billion.

"We estimate the New York State Attorney General investigation could ultimately cost Merrill Lynch as much as $2 billion," Prudential Financial analysts David Trone said in a note to clients, noting that his estimates were based mostly on "worst-case" scenarios.

Trone said those include a $1 billion financial settlement with the 50 states, $500 million in lost business and $30 million in costs from changes in its research department for a total of $1.53 billion.

And while he said there is virtually no chance that civil suits against Merrill will succeed, since it is difficult to prove an investor lost money solely based on an analyst's advice, he added $420 million to Merrill's estimated cost, bringing the total possible costs to about $2 billion.

Later Wednesday, Spitzer said there had been contacts between his office and the U.S. Justice Department regarding his investigations.

A spokesman for the Justice Department's criminal division said Tuesday that it would take a closer look at allegations that securities analysts have misled the public.

"I'm glad to see Mr. Chertoff at the Department of Justice has said they are beginning a criminal investigation into this behavior," Spitzer told a news conference on Capitol Hill, referring to Michael Chertoff, the head of the criminal division at the department. "There have been contacts between my office and Mr. Chertoff's office," he added.

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Spitzer previously said he was eager for the Securities and Exchange Commission to become involved but was less enthusiastic about the Justice Department becoming involved.

Spitzer is also heading a multi-state task force.

The North American Securities Administrators Association in Washington, which represents securities administrators in all 50 states, the District of Columbia and Puerto Rico, said attorneys general from New York, New Jersey, and California will co-chair the task force looking into securities analysts and the defrauding of investors.

Nine other states have joined the task force and those states are: Utah, Connecticut, Massachusetts, Washington, Arizona, Florida, Illinois, Alabama and Indiana.

California Corporations Commissioner Demetrios Boutris has already issued two subpoenas to Merrill Lynch offices in San Francisco and Los Angeles.

Sources told CNNfn that the state of California Corporations Office also sent investigators to the Los Angeles and San Francisco offices Thursday after issuing subpoenas for books and records.  

-- from staff and wire reports