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The legal war between one of the world’s biggest and most secretive hedge funds and one of its former star money managers saw an unlikely new front open up this year: the exclusive Hudson National Golf Club in Westchester.

Daniel Michalow’s membership was initially terminated last year for what he describes as a series of minor infractions spread over a decade. These included one occasion when his golf partner Larry Summers, the former US Treasury secretary, answered an email on a green from then president Barack Obama. On another occasion, Mr Michalow missed a cocktail party that was being held in honour of his father joining as a member. 

Instead, Mr Michalow, a 37 year-old and an expert on some of the more esoteric sections of the fixed income market, believes there was another reason for his golf club ejection: pressure from his former employer DE Shaw, the hedge fund which manages $50bn of assets. In a letter to the golf club in May, Mr Michalow claimed that “DE Shaw has gone to great lengths to impede me from continuing my career” and that he believed one of its executives contacted the club “attempting to interfere with my membership.”

After initially deciding to expel him from the club, Hudson National later downgraded his punishment to a suspension. In a letter to Mr Michalow, it said it disagreed with “the characterisation of events contained in your letter.”

The golf club bust-up is the latest twist in a ferocious battle between Mr Michalow and DE Shaw over his controversial departure last year — a battle that has cast an uncomfortable light on one of the world’s biggest hedge funds.

Mr Michalow was once a rising star and one of DE Shaw’s youngest-ever partners. 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”.

Mr Michalow is now suing for defamation and is seeking hundreds of millions of dollars in damages and a public apology in a case that will be heard in private arbitration. He says DE Shaw’s claim that he committed “gross violations” implies worse misconduct than he believes he is guilty of. He also argues it was a way for the hedge fund to restrict him from working for a competitor or starting his own fund by making him too toxic to hire or to allocate money to. 

“This entire episode was deliberately escalated from a clumsy private joke told to a friend to #MeToo infamy, all because the billionaires running DE Shaw feared their former protégé would become a formidable competitor and, perhaps, shave a few million dollars off their year-end bonuses,” says Tom Clare, a lawyer for Mr Michalow.

DE Shaw, one of the highest-grossing hedge funds in history and a pioneer of the “quantitative” investing techniques that are now conquering Wall Street, disputes the claim that it is trying to damage a potential rival. 

“Mr Michalow’s account of his separation from the firm and subsequent events is inaccurate and incomplete,” DE Shaw said in a statement. “The firm will defend itself against his meritless claims in the arbitration.” 

Hudson National declined to comment and DE Shaw disputes Mr Michalow’s account of why he was expelled from the golf club. A person close to the fund said it is “entirely false” that DE Shaw had anything to do with Mr Michalow leaving the club, and said he had resigned from Hudson National.

Letters seen by the Financial Times show that the club accused Mr Michalow of several instances of “conduct unbecoming” to a member, which also included dress code violations. Mr Summers said that he has “no idea whether I was the person in question with respect to Hudson [golf club] or if I was, who I was talking to.”

For DE Shaw, the spat has poked holes in its image as an office filled with casually-dressed, bookish quantitative analysts, where former employee Jeff Bezos concocted the idea for what became the world’s biggest ecommerce company, Amazon.

The dispute also comes at a delicate juncture for the wider hedge fund industry, which is facing an intensifying war for talent — especially for less brash coders and data scientists, rather than traditional alpha male traders who once dominated the sector. The result is that many firms are struggling to retool their culture for the new era in a bid to appear more enlightened and diverse. 

At the same time, they need to find a way of keeping their biggest money-spinners — or at least to part company with them in a discrete way if the relationship sours. Normally, that has meant hefty payouts coupled with non-disclosure and non-compete agreements. The dispute between Mr Michalow and DE Shaw — with echoes of the HBO series Billions that chronicles the world of fantastically wealthy, cut-throat hedge fund managers — highlights the mutually assured destruction that can take place when this cozy way of handling conflicts breaks down.

“No matter how rich you are or how many degrees you have, how you treat people ultimately tells all,” Mr Michalow told the Financial Times. “The executive committee at DE Shaw obviously missed that important life lesson.”

Mr Michalow joined the hedge fund in 2004 after graduating from Harvard University, starting in the credit group. In 2007, when he was 25 and cracks in the financial system were beginning to emerge, he founded and ran DE Shaw’s structured credit group. A series of lucrative trades in high-yield index tranches helped propel his rise at the firm. By 2011 he was one of its youngest-ever partners. 

He sat on DE Shaw’s risk committee from 2014 to 2016 and represented the firm at the World Economic Forum in Davos in 2018. By the time he left in March last year, he was co-running the firm’s discretionary macro strategy, which then managed about $6bn, and was widely expected to join the executive committee. In his final year, he earned $40m.

But when the “sugar tits” comment was reported to management — not by the person who he said it to, but to another employee who it was repeated to, according to Mr Michalow — the firm took it seriously. 

Initially, both sides agreed that Mr Michalow would be given a two-week suspension with “sensitivity training” as a penalty, according to documents seen by the FT. However, within two days, after a series of meetings with senior figures at the firm, Mr Michalow agreed to resign, a move announced by DE Shaw to investors as a “retirement” by the then 35-year-old. 

In messages seen by the FT between Mr Michalow and DE Shaw executive committee member Max Stone, who was his direct manager, the latter promised to help with tamping down any speculation around the departure. Mr Stone said that approach would be “good for everyone, and also the truth, although I also need to be careful not to go too far and say it was nothing which would be pretty invalidating to the various people that came forward”.

Mr Michalow alleges that what had been an amicable departure turned hostile after he mentioned to Mr Stone that he planned to continue his career in finance, rather than actually retire. 

The hedge fund spent several weeks conducting an internal investigation into Mr Michalow and found several other instances of conduct that might be considered questionable, he says. These included a time he told a colleague in a message that he needed a hug, a team-building camping trip that some employees said they felt pressured to attend, and changing his shirt in the office after he realised it was inside-out. 

DE Shaw declined to comment on the internal investigation or whether it uncovered any other evidence about Mr Michalow’s conduct. The fund said it disputes Mr Michalow’s account of the circumstances of his departure, the nature of the incidents concerning his behaviour and the notion that his departure became hostile when he said he would continue to work in finance. But it declined to provide details of its version of events. 

Subsequent to his departure, the firm asked Mr Michalow to sign a non-compete agreement, but refused to pay him for the period during which he would not be able to work for a competitor. He refused the request. 

What happened next was an unusually public move for a hedge fund that has shunned attention. On May 7, DE Shaw made a public statement saying an internal review found “gross violations of our standards and values”, a comment that is now at the heart of Mr Michalow’s case against the firm. 

Following the public statement, Mr Michalow published a letter on social media he had sent privately that morning to the hedge fund’s founder, David Shaw, where he conceded that he might have deserved being dismissed for being “an abrasive boss”. But Mr Michalow, who does not dispute making the comment about hiring an assistant, insisted there had been no sexual misconduct.

He painted a picture of lascivious behaviour at DE Shaw that contrasts with its earnest image — implying that his transgression was minor in comparison. Mr Michalow described it as a company that threw “lavish, alcohol-filled parties” and where visits to strip clubs were common and where there had been instances of senior employee relationships with their juniors. DE Shaw declined to comment. 

Other former DE Shaw employees have rallied to Mr Michalow’s defence. 

John Liftin, who was general counsel at the hedge fund for about a decade up until the end of 2016, says Mr Michalow “knew that DE Shaw has zero tolerance for regulatory risk” and that there were no incidents while he was there.

“He would come to me or a compliance officer if he had a question about a proposed trade or strategy and, to the best of my knowledge, always followed the advice he received,” Mr Liftin says. “I’m not aware he ever had any regulatory or compliance issue at the firm.”

Parvinder Thiara, one of Mr Michalow’s former money managers, left after a disagreement over his trades in late 2015. He has since launched his own hedge fund, Athanor Capital. 

Mr Thiara said he was not surprised by the firm’s stand-off with Mr Michalow. “This seems like DE Shaw’s playbook when a talented former employee leaves and chooses to compete.”

A former managing director, who declined to be named, said he and others who had worked with Mr Michalow for several years were mystified by the firm’s statements after his departure. DE Shaw’s public comment about Mr Michalow also irked one of its largest investors, which privately questioned why the fund would make such a public move against a former employee. 

Mr Michalow alleges that following his departure, DE Shaw underwent a months-long effort to dig up dirt on him, interviewing employees and contacting at least two former employees to see if they had any incriminating information. He says DE Shaw also moved to block him from speaking to prominent individuals linked to the firm.

These people include Robert Rubin, another former US Treasury secretary, who rescinded an offer to have lunch until after the dispute with DE Shaw was sorted, according to an email seen by the FT. The office of another prominent figure informed Mr Michalow after his departure that they were no longer able to be in contact at the request of DE Shaw’s legal department.

The fallout from such a dispute can spread far beyond the professional realm, especially when both sides see no other recourse but to hunker down and wage war to protect their reputations.

The person close to the firm suggested that the golf club may have tried to end their relationship with Mr Michalow not because of DE Shaw’s statement, but because of his open letter to the founder, which was widely reported on last year. 

In the wake of Mr Michalow’s messy departure, the firm has sought to impose restrictive new employment agreements which include non-compete clauses for its investment staff. The demands took effect on September 16, the day when Mr Michalow’s 18-month non-solicitation period ended, making him free to recruit DE Shaw staff for any venture of his own.

While the hedge fund insists the date was purely coincidental, some of the firm’s employees said they viewed it as directly linked. 

The non-compete agreements effectively bar any former DE Shaw employee from working in the entire finance industry for up to a year depending on seniority and where they work, according to one of the agreements seen by the Financial Times.

If DE Shaw employees decide not to sign the new agreements, they will be fired but allowed to keep the deferred compensation they would normally forfeit. Managers at the firm told staff in April they opted to impose the non-compete agreements in order to bring DE Shaw into line with common hedge fund industry practice, and to protect intellectual property such as algorithms, trading infrastructure or other proprietary information.

Mr Michalow’s case, which is slated to be heard in private arbitration next year, is going through the discovery phase, where both parties request documents from the other side that they hope could help them prove their case.

While Mr Michalow has vowed to return to the hedge fund industry, he is not currently working as he focuses on his legal case. 

He has at least scored one small victory — in July Hudson National Golf Club reinstated his membership.