Exclusive: Merrill misstep may hurt battle vs. broker claims NEW YORK (Reuters) - Merrill Lynch's battle to void a $10 million arbitration ruling suffered a setback this week after a new court filing raised questions about its claims that a panel member had not disclosed her potential conflicts. The brokerage giant, which Bank of America (BAC.N) agreed to acquire in 2008, is challenging an April 3 arbitration ruling that awarded two brokers, Tamara Smolchek and Meri Ramazio, more than $10 million in damages stemming from unpaid compensation claims. But now, one of its key arguments in a high profile case that could affect hundreds of ex-Merrill brokers - that the arbitration panel's chairwoman was biased - may fail because of the firm's own revelations. Merrill alleged that the panel's chairwoman, Bonnie Pearce, did not properly disclose that she was married to a lawyer, Robert Pearce, who has represented clients against Merrill at least five times and won a $1.3 million award against the brokerage in 2003. But late Wednesday afternoon, the firm filed a motion that revealed that a Merrill lawyer had in fact researched the husband, Robert Pearce, and his prior award against Merrill, before the start of arbitration hearings. Merrill's attorney in the Smolchek case, Reed Smith LLP's Douglas Spaulding, late last week found five pages printed from Robert Pearce's website eight days before the first hearing, which was January 23. The discovery was revealed in a Wednesday filing written by Miami lawyer Peter Homer, whom Merrill hired on January 26 to represent it after the Smolchek hearings began. Spaulding also found three more pages that had been printed two days before hearings and a copy of a 2003 arbitration award where Merrill was ordered to pay Pearce's clients $1.3 million in damages over misleading research. It is a setback for Merrill, which claimed on multiple occasions it was unaware of Pearce's relationship or the kind of cases her husband pursued until after the Smolchek hearings had begun. "It's a screw-up; it hurts their credibility with the judge," said Marc Dobin, a lawyer in Jupiter, Florida, who represents brokers and brokerages but is not involved in the Merrill broker compensation cases. You can't argue arbitrator bias that you didn't know about if you knew about it. Spaulding could not be reached for comment Friday. A Merrill spokesman declined to comment. The court filing, however, said "Spaulding had no recollection of accessing this information or reviewing it prior to the hearing." Last month a FINRA arbitration panel awarded more than $10 million in compensatory and punitive damages to Smolchek and Ramazio, who left Merrill in 2008 after it agreed to be purchased by Bank of America. The panel, which took the unusual step of releasing a detailed 16-page ruling, said the firm wrongfully denied them their deferred pay, took away their book of business and engaged in disruptive and abusive behavior during the hearings. Merrill argues it doesn't owe a penny. "We believe these claims are without merit and are continuing to defend against these claims," a spokesman said. An acquisition by itself does not provide any basis for these types of claims. An hour after receiving the Smolchek decision, Merrill asked a Florida federal judge to vacate the award on grounds the hearings were not fair because the chairwoman was not impartial. Two weeks ago, a Florida judge gave the firm until June 8 to seek evidence to prove its claims. Industry lawyers considered that ruling a victory for Merrill, since courts usually rule on arbitration decisions without allowing more argument. That was short-lived. Merrill revealed the discovery of the documents and postponed depositions of the Pearces that had been scheduled for Thursday and Friday, according to Michael Taaffe, a Florida attorney who represents Smolchek and about 1,000 other brokers in similar pay claims against Merrill. Vacating the Smolchek ruling is important for Merrill not just because of the high cost, but also because the FINRA panel criticized Merrill's conduct toward brokers and during the Smolchek hearings. Although more than 3,000 brokers left Merrill after the BofA deal, the panel noted not one claim for vesting of deferred pay was approved by the firm's "good reason" committee. Merrill's latest filing suggests the firm made false claims about what it knew, which could land Merrill in hot water with regulators and with the court, industry lawyers say. "The revelation hurts Merrill's argument," said Jonathan Uretsky, a New York-based lawyer who represents brokerages, but is not currently involved in any Merrill cases. Merrill, in its latest filing, insists the newly revealed documents do not matter and that Pearce still failed to disclose key details about her husband's practice. Uretsky said lawyers can object to the assigned arbitrators before the hearing and twice after the panel is assigned: first during a telephone conference that occurs before the hearing begins and then at the beginning of the hearing. He doubts Pearce's marriage to a lawyer for investors - by itself - means she is biased. "The whole purpose of the disclosure is not to give you an out," Uretsky said. If I don't disclose to you that 'red' means 'stop,' (you still) know to not go through the light. Reporting By Joseph A. Giannone and Suzanne Barlyn; Editing by Jennifer Merritt and Richard Chang