Daniel Michalow was a golden child at D.E. Shaw, the now-$70 billion hedge fund he joined in 2004 at the age of 21, straight out of Harvard. By the end of 2011, he had become the firm’s youngest managing director, or partner, and was co-heading its macro group with a member of the executive committee whom he considered a mentor.
But his world took a sudden turn at the height of the #MeToo movement when Michalow made a sexist comment and left the hedge fund soon after. The events surrounding his departure in 2018 turned him into a self-described “reluctant” litigator against one of the world’s most prestigious hedge funds and what he argues are illegal employment contracts that attempt to strip employees of their statutory and civil rights, keeping them silent about any misdeeds.
Michalow refused to sign those documents and promptly sued the hedge fund in arbitration. The battle has cost D.E. Shaw: Michalow won an industry-record $52 million in a Financial Industry Regulatory Authority defamation arbitration in 2022, plus the hedge fund paid $10 million in a 2023 settlement with the Securities and Exchange Commission based on some issues in its employment contracts. And ongoing legal claims could cost it an additional $14.4 million in what the former hedge fund managing director and partner says is back pay — deferred compensation — that the firm is withholding.
“David Shaw claims to be the moral and progressive hedge fund manager,” Michalow tells Institutional Investor. But he says the hedge fund’s employment contracts, its behavior toward him, and its unwillingness to pay what it owes him “tell a very different story.”
Michalow is currently trying to get the Court of Appeals of New York State to take his case — an uphill battle, as two lower appeals courts have refused to do so, for reasons ranging from questions over the nature of the compensation Michalow claims he is owed to a general reluctance by the courts to challenge arbitration rulings.
A spokesman for D.E. Shaw declined to comment for this article. But after Michalow won the defamation case, a spokesman said in a statement to The New York Times, “We were disappointed by the outcome of the arbitration.” D.E. Shaw did not admit or deny the SEC’s findings, but according to The Wall Street Journal, it informed employees that it had “updated” the language in its agreements and was “committed to protecting the ability of current and former employees to communicate directly with regulators.”
Whatever happens next, Michalow is shedding light on some of the employment contracts prevalent in the hedge fund industry, which include noncompetes, nondisclosure agreements, and, in this case, something he calls “release for pay.”
Under the terms set forth by D.E. Shaw, to receive deferred compensation, Michalow had to sign a release absolving the company of legal liability for any misconduct during and even three years after his entire employment period, forgoing the right to sue the firm or report its behavior to regulators. If he had agreed to sign, Michalow said he would have received a portion of his pay each year for three years after leaving the firm. The way the pay is structured, that amounts to about one third of the total earned per year, as explained in court documents.
“It’s just fundamentally wrong,” says Christopher Leung, an attorney for the National Employment Lawyers Association/New York, the National Whistleblowers Association, and Towards Justice who recently filed an amicus brief in support of Michalow’s effort to get the appellate court to hear the case. In the brief, Leung notes that such contracts have come under harsh criticism from the Equal Employment Opportunity Commission, which has said “non-cooperation or covenant-not-to-sue provisions interfere with its enforcement activities and constitute unlawful retaliation.”
Under D. E. Shaw’s “release-for-pay scheme,” even if an employee has been “sexually harassed, or is victimized by racial discrimination, retaliation, or anything else” while at the company, “she must either forfeit her rights to legal redress or forfeit her pay for labor and services already provided,” attorney Jeremy Wallison wrote earlier this year in a memorandum filed in support of Michalow’s petition to the New York Court of Appeals. When Michalow refused to cede those rights, Wallison said, the firm “confiscated” more than $14.4 million of his pay.
The former hedge fund partner has gotten support from other employees’ rights groups, including one that grew out of the #MeToo movement. “No one should ever have to make a decision between earning a living and speaking their truth,” assert Gretchen Carlson and Julie Roginsky, co-founders of the Lift Our Voices nonprofit. (Carlson is a former Fox News host who famously sued the company for sexual harassment.)
The dispute goes back to a sexist comment Michalow made in 2018, when he said that he wanted to hire an assistant he could call “sugar tits” — which he later said was a repetition of something actor Mel Gibson had once said. Another employee overheard the comment and reported it to D.E. Shaw’s human resources department. After the dustup, Michalow agreed to leave the firm. A letter from D.E. Shaw dated March 18, 2018, which II has seen, outlined the terms of the “voluntary termination” of his employment. On May 1 of that year, the language was changed to a departure by “mutual agreement.”
The second letter also included a noncompete and the “release for pay” that is the subject of the ongoing legal dispute. Last year, the Federal Trade Commission banned noncompete agreements, but that ban was blocked by a Texas district appeals court, a favored venue for corporations contesting government regulations they dislike. The FTC has appealed that ruling. Meanwhile, in the hedge fund talent wars, it’s long been common for a fund recruiting an employee to simply pay whatever compensation is due the new hire. If necessary, it will let him sit out the remaining time — so-called gardening leave —before joining his new employer.
But Michalow’s situation was different. The media got wind of the initial #MeToo issues, and three days before the deadline to sign the documents, D.E. Shaw issued a statement to Bloomberg that the former managing director had been fired because he had “engaged in gross violations of our standards and values.” Reports circulated that he’d been fired for sexual misconduct. But there was no mention of these issues in his termination agreement, which also did not say he was being fired.
Michalow said he was on the verge of signing the documents when the Bloomberg story broke. “They defamed me,” says the former managing director, explaining that the press statements made it “impossible” for him to get another job.
“There was a moment in the process where I realized that D.E. Shaw was a brutal place. I had sort of thought it was this nice hedge fund where everyone’s like family and they care about you,” Michalow says, citing his relationship with senior executives. “I even went to their weddings.” But once “I was no longer making them money and was potential competition,” he explains, “it was a whole different playbook.”
Michalow named members of the executive committee, including Max Stone — the person he considered a mentor — Edward Fishman, Julius Gaudio, and Eric Wespic, in his complaints to both FINRA and the New York State Court of Appeals.
The main matter of contention appears to hinge on a technical definition of the nature of Michalow’s pay. New York courts have held it unconstitutional to withhold a worker’s wages. But when one lower appellate court denied Michalow’s petition, it said there were “justifications for a finding that the compensation petitioner seeks is incentive compensation rather than earned wages under labor law.”
In its opposition to the motion on the latest appeal, D.E. Shaw lawyers described the money as “unvested incentive compensation” and “post-separation payments,” saying that Michalow’s refusal to sign the release resulted in a “nonvesting termination.” It also argued that a “release-for-pay scheme” did not exist.
Michalow said he believes the nature of his pay also makes it subject to labor law. “My formula was my entire compensation, was obviously designed to reflect my work responsibilities, and was formulaic and nondiscretionary,” he tells II. “All of that qualifies it as a wage under the labor law.”
Wallison argues in his motion that the compensation was Michalow’s pay for labor and services already fully rendered, not some sort of “post-termination” benefit, like severance. He describes the plan as “earned and deferred,” with a promise to pay it to Michalow in three annual installments over the following three years. Under its terms, Michalow received base pay of about $500,000 each year and the rest was compensation determined by a nondiscretionary formula based on the profits of his group and of the entire firm each year.
Even D.E. Shaw seemed to acknowledge Michalow had earned the money. In a statement to The Wall Street Journal in 2018, shortly after the former hedge fund partner had filed his initial claim, a spokesman said, “Under his long-standing employment agreement, Mr. Michalow would have been entitled to receive previously earned compensation had he signed a standard separation and release agreement.”
It’s unclear how many other firms demand similar agreements. But according to the SEC, some 400 D.E. Shaw employees signed such release agreements between 2011 and 2019. D.E Shaw has said these documents are common in many partnerships and are “designed to prevent departing partners from collecting a share of the partnership’s profits while also pursuing claims against their former partners.”
Attorney Leung notes, “The issues presented here will likely affect millions of other New Yorkers subject to an arbitration employment agreement.” Most people sign such documents because the back pay is likely to be more than they would receive through arbitration, where, he says, “the odds are effectively stacked against them.” He adds, “Employees proceeding in arbitration are generally less successful than those litigating their claims in court.”
Michalow was an outlier. After winning an unusually large award in the defamation case through arbitration, he appears to be the only former Wall Street employee who has taken the release-for-pay matter to arbitration, and the only one to ask an appellate court to vacate the portion of a FINRA arbitration that let it stand.
“There is no question they defamed him and intentionally caused $52.125 million in damages to his reputation — FINRA decided that. Nor is there any question he did all the work, and made the firm and its investors a ton of money, in exchange for his compensation,” Wallison says to II.
The hedge fund documents also forbade Michalow to report any misconduct to regulators. His refusal to sign them was vindicated on that front when the SEC found that D.E. Shaw had raised “impediments to whistleblowing by requiring employees to sign agreements prohibiting the disclosure of confidential corporate information to third parties, without an exception for potential SEC whistleblowers.” The regulator added that 400 departing D.E. Shaw employees had to “sign releases affirming that they had not filed any complaints with any government agency in order for the employees to receive deferred compensation and other benefits that was sometimes worth millions of dollars.”
The upshot of the SEC probe was that the hedge fund agreed to be censured, to cease and desist from violating the whistleblower protection rule, and to pay a $10 million civil penalty. According to the SEC, D.E. Shaw had not included “whistleblower protection language in its employment agreements until 2019 and in its releases until 2023.”
After D.E. Shaw settled with the SEC in 2023, Michalow pleaded with the firm to give him his deferred compensation. “This might be a good moment to put this matter behind us,” he wrote in an email to the firm’s executive committee and to David Shaw personally.
Michalow said none of them responded to him.
Challenging arbitration decisions is difficult, and two lower appeals courts have already turned Michalow down. One reason is that the Federal Arbitration Act favors arbitration, and appellate courts have historically been reluctant to second-guess those decisions.
In denying Michalow’s petition, one lower appellate court wrote that “petitioner has failed to identify a public policy embodied in statute or decisional law prohibiting the arbitrators, in an absolute sense, from enforcing the employment agreements underlying his compensation claims.”
However, in his amicus brief to the New York State Court of Appeals, Leung directly disputed that argument, noting that a recent decision in a federal court found that the courts should not necessarily favor the decisions of arbitrators.
“Because of the proliferating use of arbitration and confidentiality clauses in employment agreements, millions of workers’ disputes are being (or will be) addressed through a forum that results in worse outcomes for employees, the concealment of employer violations, and an undermining of the rule of law,” he wrote.
Rachel Dempsey, the associate director of Justice Forward, a nonprofit that litigates on behalf of workers and has signed on to the amicus brief, tells II that “this is one specific example of fine-print abusive contract terms that keep people from exercising their rights.”
She adds that similar terms are found even in contracts for minimum wage workers, although Wall Street employees’ compensation is structured differently — and is a lot more money. “It’s against public policy because it disincentivizes workers from speaking out about conditions of the workplace. That’s a fundamental right workers have.”
Because such clauses are prevalent in the industry and employees are incentivized to sign them, the court is unlikely to get another “opportunity to correct this public policy violation,” Wallison notes in his memorandum.
In this case, keeping $14.4 million of Michalow’s pay serves effectively to indemnify D.E. Shaw against liability up to that amount. “Damage awards in excess of $14.4 million are exceedingly rare in suits by employees against their employers,” Wallison says. “Thus, just as public policy prohibits, the release-for-pay scheme will in fact immunize the firm against liability for most instances of even intentional wrongdoing.”
