UPDATE 1-US court backs FINRA arbitrators ruling in Merrill case

Oct 26 (Reuters) - A U.S. federal court has upheld a $520,000 arbitration ruling against Merrill Lynch that led to the firing - and rehiring - of three securities arbitrators.

The U.S. District Court for the Northern District of Georgia rejected arguments by Bank of America Corp's Merrill Lynch unit that the three arbitrators who made the initial ruling were biased toward the investors who initiated the case.

Merrill alleged the arbitrators, who heard the case in the Financial Industry Regulatory Authority's (FINRA) arbitration forum, ``took control'' of the hearing by extensively questioning its witnesses.

That behavior, however, did not compromise ``the fundamental fairness of the hearing,'' wrote Atlanta Judge Willis Hunt Jr. in an opinion released late on Thursday. The case, which began in 2009, was filed by a Georgia couple, Robert and Joan Postell, who alleged that Merrill failed to adequately monitor their accounts. Robert Postell died during the proceedings.

``We are disappointed in the court's decision,'' a Merrill Lynch spokesman said in a statement issued by the firm.

FINRA initially dismissed the arbitrators between mid-2011 and early 2012. The dismissal raised questions about whether the influence of a major Wall Street firm was powerful enough to prevent arbitrators who make decisions adverse to the industry from continuing to serve.

The three were reinstated in July after a FINRA official reviewed the situation for a second time.

FINRA, which has a roster of about 6,400 arbitrators, dismisses about 30 per year for reasons ranging from unprofessional conduct to mental impairment.

``My client is pleased with the ruling and we're happy to get this issue behind us,'' said Bill Leonard an Atlanta based lawyer who represented the investors.