IT HAD to happen eventually. In Manhattan last Thursday Eliot Spitzer finally lost a battle in the first real courtroom test of the New York attorney-general’s campaign against financial fraudsters. In a verdict that will cheer his many enemies a jury found the former Bank of America broker Theodore Sihpol not guilty of 29 counts of larceny, falsifying business records and other crimes.

The acquittal is a significant setback for Spitzer, who has made a name for himself as the scourge of corporate wrongdoers while largely avoiding fighting it out in the courtroom.

Pressure is Spitzer’s weapon. The attorney-general has won multi-million-dollar settlements from corporate defendants, forced executives to resign and pushed through sweeping changes of practices on Wall Street and in the mutual fund and insurance industries. In the main he has done it by making threats that he has never had to follow up.

Spitzer’s campaigns have made him a star. He has announced plans to run for governor in 2006 and has even been tipped as a potential presidential candidate.

The Sihpol case seemed like an easy win for the prosecution. Sihpol was accused of improper trading of mutual fund shares, abuses Spitzer said were widespread in the industry and had hurt ordinary investors. Before the case reached court the mutual fund industry had already promised reforms under the threat of prosecution from Spitzer and paid a total of $3 billion in fines, restitution and fee cuts. Sihpol’s old employer, Bank of America, paid $675m to settle improper trading charges.

Spitzer’s team is huge and his cases deeply researched. As he headed for court, the case looked bleak for Sihpol, who faced up to 30 years in prison if convicted. Spitzer had records of incriminating telephone conversations between Sihpol and traders at a New Jersey hedge fund Canary Capital Partners. In addition, two of Canary’s former executives, Edward Stern and Noah Lerner, testified against Sihpol in return for freedom from prosecution.

Before the trial Canary and Stern, the company’s former chief, had paid $40m to settle civil charges against them. But the jury did not like the Canarys’ song. After the trial one of the jurors, retired bookkeeper Doris Bembury, said she didn’t believe Stern or Lerner. “I felt they were pinning everything on somebody when they should have been prosecuted themselves,” Bembury said.

Spitzer is not alone in using flawed executives to prosecute their former colleagues. Most recently Scott Sullivan, former financial wonderboy at WorldCom, the world’s biggest bankrupt, was the prime witness against his mentor, the WorldCom founder Bernie Ebbers. That trial ended in conviction.

This dent in Spitzer’s record may have an impact on two more high profile actions the attorney-general is threatening. Spitzer is suing Dick Grasso, former chairman of the New York Stock Exchange, over his $200m pay package. And last month he sued Maurice “Hank” Greenberg, former chairman of American International Group, along with his former company and another former AIG executive, accusing them of massaging AIG’s financial results.

Joseph Umansky, an AIG reinsurance executive, was recently granted immunity by Spitzer’s office in exchange for his testimony before a state grand jury.

A loss in either of those cases would be far more damaging to Spitzer’s reputation. Having been terrified of Spitzer since his awe-inspiring prosecution of Wall Street, his enemies now see a chink in his armour.

After the Sihpol verdict both Greenberg and Grasso may be tempted to have their day in court. But they’d be foolish to look at a short-term setback as a sign that Spitzer has peaked. The attorney-general is a man who likes to win — and he has got used to it. Losing is sure to make him more determined than ever. Spitzer may have lost this case but you can bet he’ll be back and fighting harder than ever.