Key Takeaways
- • Daniel Michalow, a former D.E. Shaw managing director and partner, won an industry-record $52 million in a FINRA defamation arbitration in 2022, which the firm has been unable to fully resolve as he continues to pursue claims over employment contracts.
- • D.E. Shaw paid $10 million in a 2023 SEC settlement over employment contract provisions that impeded whistleblowing, and the SEC found about 400 departing employees signed release agreements between 2011 and 2019.
- • Michalow alleges the firm is withholding roughly $14.4 million in deferred compensation, which he says is earned wages under New York labor law, conditioned on signing a "release for pay."
- • Michalow is seeking review by the New York Court of Appeals after two lower appellate courts declined to hear his case, an uphill path given the reluctance of courts to revisit arbitration rulings.
- • The case highlights release-for-pay and related restrictive provisions common in hedge fund employment agreements, which could affect many New York employees subject to arbitration clauses.
Summary
Daniel Michalow joined D.E. Shaw in 2004 at age 21 straight out of Harvard, becoming the firm's youngest managing director by the end of 2011 and co-heading its macro group under executive committee member Max Stone, whom he considered a mentor. According to Institutional Investor, his career at the now-$70 billion hedge fund ended in 2018 after he made a sexist comment about wanting an assistant he could call "sugar tits," which he later said repeated a line attributed to actor Mel Gibson. Another employee reported the remark to human resources, and Michalow agreed to leave the firm. A March 18, 2018 letter described a "voluntary termination," later changed on May 1 to a departure by "mutual agreement."
The dispute escalated when D.E. Shaw told Bloomberg that Michalow had been fired for "gross violations of our standards and values," three days before his deadline to sign separation documents. Michalow says the statements made it "impossible" for him to find another job. He refused to sign a release that would have absolved the firm of liability for misconduct during his employment and for three years afterward, forgoing the right to sue or report misconduct to regulators. Under the arrangement he describes, signing would have yielded about one third of his annual deferred pay for three years. Michalow's base pay was about $500,000 per year, with the balance set by a nondiscretionary formula tied to group and firm profits, according to court filings cited by the publication.
Michalow won the FINRA defamation arbitration in 2022, which found the firm liable and awarded $52.125 million in damages. In 2023, D.E. Shaw paid $10 million to settle an SEC action over employment agreements that the regulator said impeded whistleblowing. D.E. Shaw did not admit or deny the findings and told employees it had updated the language in its agreements, according to The Wall Street Journal. A firm spokesman said in a statement to The New York Times: "We were disappointed by the outcome of the arbitration." The firm has argued the payments are unvested incentive compensation and post-separation payments, and that no release-for-pay scheme exists. Michalow's attorney, Jeremy Wallison, argues the amounts are earned and deferred wages for labor already performed, and that the firm has withheld more than $14.4 million.
Michalow is seeking review by the New York Court of Appeals, after two lower appellate courts declined to hear the case. One lower court said there were "justifications for a finding that the compensation petitioner seeks is incentive compensation rather than earned wages under labor law." Christopher Leung, representing the National Employment Lawyers Association/New York, the National Whistleblowers Association, and Towards Justice in an amicus brief, said such provisions are criticized by the Equal Employment Opportunity Commission and that the issues could affect millions of New Yorkers subject to arbitration agreements. Michalow appears to be the only former Wall Street employee to have taken the release-for-pay issue to arbitration. The Federal Trade Commission's ban on noncompete agreements remains blocked by a Texas appeals court, and the FTC has appealed that ruling.
The dispute escalated when D.E. Shaw told Bloomberg that Michalow had been fired for "gross violations of our standards and values," three days before his deadline to sign separation documents. Michalow says the statements made it "impossible" for him to find another job. He refused to sign a release that would have absolved the firm of liability for misconduct during his employment and for three years afterward, forgoing the right to sue or report misconduct to regulators. Under the arrangement he describes, signing would have yielded about one third of his annual deferred pay for three years. Michalow's base pay was about $500,000 per year, with the balance set by a nondiscretionary formula tied to group and firm profits, according to court filings cited by the publication.
Michalow won the FINRA defamation arbitration in 2022, which found the firm liable and awarded $52.125 million in damages. In 2023, D.E. Shaw paid $10 million to settle an SEC action over employment agreements that the regulator said impeded whistleblowing. D.E. Shaw did not admit or deny the findings and told employees it had updated the language in its agreements, according to The Wall Street Journal. A firm spokesman said in a statement to The New York Times: "We were disappointed by the outcome of the arbitration." The firm has argued the payments are unvested incentive compensation and post-separation payments, and that no release-for-pay scheme exists. Michalow's attorney, Jeremy Wallison, argues the amounts are earned and deferred wages for labor already performed, and that the firm has withheld more than $14.4 million.
Michalow is seeking review by the New York Court of Appeals, after two lower appellate courts declined to hear the case. One lower court said there were "justifications for a finding that the compensation petitioner seeks is incentive compensation rather than earned wages under labor law." Christopher Leung, representing the National Employment Lawyers Association/New York, the National Whistleblowers Association, and Towards Justice in an amicus brief, said such provisions are criticized by the Equal Employment Opportunity Commission and that the issues could affect millions of New Yorkers subject to arbitration agreements. Michalow appears to be the only former Wall Street employee to have taken the release-for-pay issue to arbitration. The Federal Trade Commission's ban on noncompete agreements remains blocked by a Texas appeals court, and the FTC has appealed that ruling.
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