By Suzanne Barlyn

Dec 7 (Reuters) - Merrill Lynch may be one step closer to ending its battle with former brokers who say the firm denied them deferred compensation when they left after the brokerage was bought by Bank of America Corp.

Merrill Lynch and lawyers for some ex-brokers have agreed to changes in a proposed $40-million class action settlement over retention bonuses and other deferred compensation they said was wrongly denied them. The revised settlement may encourage some brokers to drop arbitration and other legal claims against the brokerage, according to court documents.

The brokerage is also in talks to settle some individual cases with brokers, a lawyer involved with the case said. Merrill declined comment about whether it was working to settle any cases.

Merrill has been facing a pile of arbitration claims and hundreds more that could be filed. About 3,000 brokers left after the merger. More than 1,000 have already filed or planned to file arbitration or court claims.

A proposed settlement designed to address claims of more than 1,400 brokers who brought in under $500,000 in revenue was presented to a federal judge in August. That was several months after Merrill was ordered by a Financial Industry Regulatory Authority arbitration panel to pay $10.2 million to two ex-brokers over deferred compensation claims.

The ruling in that case was far more detailed than most from FINRA arbitrators, spelling out that Merrill "intentionally, willfully and deliberately breached its fiduciary duty" by depriving the two brokers of their rights to collect their money after Bank of America acquired Merrill in late in 2008.

Lawyers for some ex-brokers balked at that proposed settlement, saying the amounts many brokers would receive were too low and that some brokers might be better off pursuing individual claims.

NEW DEAL

Under the new agreement, which still needs to be approved by a judge, brokers who drop their other legal cases to participate in the settlement would get higher payouts than under the original agreement. Merrill would pay the class action lawyers up to $6.3 million in fees, depending on how many brokers participate in the settlement, instead of the lawyers being paid from the settlement pool.

The parties presented the revised agreement to U.S. District Judge Alison Nathan at Manhattan federal court this week. It was filed with the court in late November.

The lawsuit stems from Merrill's September 2008 merger with Bank of America. At issue are years of deferred compensation, some of which was held in brokers' stock savings plans.

FINE PRINT

Paying a bigger class action settlement to brokers who have already initiated individual cases, but who would drop them in lieu of the class action, would help compensate them for legal expenses and fees they have already taken on, said Charles (Chip) McCallum III, a lawyer in Vestavia Hills, Alabama who represents the class action brokers.

Brokers who do so would, in the most generous scenario, receive 70 percent of the deferred compensation plan's value for their time in the plan through 2008, rather than the 60 percent they would have received in the initial settlement. They would also receive 50 percent of the plan's value for 2009, compared with 24 percent in the initial settlement. The brokers will also benefit from a pool of funds that would not be diminished by legal fees.

Payout percentages for brokers who never made any deferred compensation requests, though, will go down if the agreement is approved. That decrease, however, could be offset by the larger settlement fund pool.

The changes to the agreement are meant to level the playing field between brokers who are eligible for the settlement but still pursuing individual cases and those already poised to participate. It also makes it less likely that brokers who settle individually will receive larger payouts than similarly-placed brokers who participate in the class action.

The revised settlement would still exclude former Merrill brokers from the deal if their revenues topped $500,000 prior to their departure. Those brokers - which could number more than 1,000 - still need to pursue their own claims.

In a related move, a lawyer representing more than 1,000 former Merrill brokers in individual arbitrations announced in court on Monday that he would withdraw a motion he had filed to intervene in the class action suit. Of those brokers, about 572 were eligible for the class as August, said Michael Taaffe, the Sarasota-based lawyer for the brokers, at the time.

Taaffe argued that the stock price used to establish the $40-million figure was too low. He did not return a call requesting comment. 

(Additional reporting by Jed Horowitz)

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