DE Shaw ordered to pay record $52mn to former star money manager

DE Shaw and four of its top executives have been ordered to pay a record $52mn to one of its former star money managers by financial industry arbitrators who found the secretive hedge fund defamed him.

A Financial Industry Regulatory Authority (Finra) arbitration panel found that Dan Michalow had not committed sexual misconduct, even though DE Shaw announced in 2018 that its investigation had found “gross violations of our standards and values”.

Once a rising star at DE Shaw, Michalow parted company with the firm in March 2018, just as the #MeToo movement against workplace harassment was sweeping the nation and the financial services industry. He has always denied sexual misconduct.

The event that sparked his departure was a report to management that he had joked to a colleague about wanting to hire an assistant who he could call “sugar tits”.

The firm later presented Michalow, then 35, with a “retirement agreement” that set out the terms of his “voluntary termination,” according to a draft seen by the Financial Times. But the talks fell apart when the two sides could not work out the terms of an agreement that would have limited the money manager’s ability to start his own fund or work for a competitor.

DE Shaw then announced that it had fired Michalow after “numerous” complaints and an investigation that found “gross violations of our standards and values”. It later demanded that all of its current employees sign non-compete agreements or be fired.

Michalow filed an arbitration claim seeking $600mn with Finra, the industry regulator. DE Shaw insisted at that time that Michalow’s account of his dismissal was inaccurate. After a delay, caused partly by the coronavirus pandemic, arguments were held last month behind closed doors.

The arbitration panel found four members of DE Shaw’s six-person executive committee liable for the defamation: Max Stone, Julius Gaudio, Eric Wepsic and Eddie Fishman.

Tom Clare, Michalow’s lawyer, said the award and the specific finding that his client did not commit misconduct “sends a strong message that DE Shaw’s conduct, which misused and weaponised an important cultural movement and put profits ahead of the truth, was both morally and legally wrong. It took four years, but the truth has finally been revealed”.

“We were disappointed by the outcome of the arbitration, and we stand by the decision we made in 2018 to terminate Mr Michalow’s employment with the firm,” DE Shaw said in statement.

DE Shaw is one of the highest-grossing hedge funds ever and a pioneer of “quantitative” investing, which is based on computer algorithms. When he left the firm, Michalow was earning $40mn a year co-running the $6bn discretionary macro strategy.

After earning a masters degree in applied maths at Harvard in 2004, he went straight to DE Shaw. He was made a partner in 2011 at the age of 29 and sat on the firm’s risk committee from 2014 to 2016.

The damages are the largest ever handed down by Finra for a dispute within the industry, and the largest overall for the last five years. The largest award ever involved an industry-client dispute in which a customer of Credit Suisse was handed $401.5mn in 2009.

“It is possible to defeat power, arrogance, and lies with persistence, humility, and truth. I’m deeply grateful to my friends and family for their support, to Tom and the legal team for their excellence, and to Finra for setting the record straight with this defamation award,” Michalow said. “I’ve learned a great deal from this experience and am excited for the future.”

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