By Karen Freifeld

NEW YORK (Reuters) - Money manager Ezra Merkin has agreed to pay $410 million to settle a lawsuit brought by New York state that accused Merkin of secretly steering client money to Ponzi schemer Bernard Madoff, according to New York Attorney General Eric Schneiderman.

"By holding Mr. Merkin accountable, this settlement will help bring justice," Schneiderman said in a statement on Sunday. "We have recovered over $400 million for the investors and charities that were harmed by history's largest Ponzi scheme."

Justice Richard Lowe of New York state court signed off on the settlement on Friday, Schneiderman's office said.

Under the agreement, Merkin will pay $405 million to compensate investors over three years, Schneiderman's office said. The other $5 million will go to the state.

Attorney Andy Levander, who represents Merkin, said in statement Merkin "is pleased to have achieved a resolution that is fair to his investors, many of whom are friends and institutions that he and his family have cared about deeply."

Investors may receive over 40 percent of their losses, Schneiderman's office said. Those who did not know Merkin was sending their money to Madoff will get more.

The settlement does not resolve a separate case brought against Merkin by Irving Picard, the trustee seeking money for all of Madoff's victims. Picard is trying to claw back $500 million that Merkin and his funds withdrew from accounts with Madoff.

Amanda Remus, a spokeswoman for Picard, did not respond to an email seeking a comment on the status of any settlement talks with Merkin over Picard's lawsuit.

The New York lawsuit, brought in 2009, said Merkin "recklessly" fed some $2.4 billion from investors in his funds into Madoff's Ponzi scheme, while claiming he actively managed their money.

Merkin held himself out as an "investing guru" and collected more than $470 million in management and other fees while he was really a "master marketer," the lawsuit said.

The lawsuit accused Merkin of self-dealing, reckless conduct and gross negligence. Continued...