Battle of emerging managers: Mill Rock sues Stellex Capital, claiming IP theft

A battle is shaping up in the world of private equity emerging managers.

Partners Christopher Whalen and Adi Pekmezovic, who formed a shop called Mill Rock Capital, are suing another emerging manager, Stellex Capital Management, claiming the firm is stealing their intellectual property, according to a lawsuit filed in April. The suit also names Stellex Chief financial officer Tony Braddock.

The Mill Rock partners claim they were induced to join Stellex to launch a credit strategy with assurances of ready investor capital that never materialized. The credit effort was eventually abandoned. Stellex claims the investors it envisioned for the fund did not want to back Whalen and Pekmezovic, which led to the firm stopping the fundraising.

After the credit strategy was abandoned, Stellex offered Whalen and Pekmezovic roles at the firm, but they declined. Stellex said it then fired the two executives.

At issue is the creation of trademarks for Mill Rock Capital and the creation of a legal entity called Great Mill Rock.

Whalen and Pekmezovic claim they own the legal entity, while Stellex says it owns it because the two executives were employed by Mill Rock, a wholly owned Stellex subsidiary, at the time of creation.

Whalen and Pekmezovic believe Stellex is attempting to seize the trademarks to take credit for two investments they made under the Great Mill Rock name, the lawsuit said. Stellex allegedly wants to claim the track record for the two investments as it attempts to raise $1.25 billion for its second fund, the lawsuit said.

Whalen and Pekmezovic are asking for a jury trial and, among other things, compensatory and punitive damages. The two “have repeatedly urged Stellex to halt its malicious campaign, but Stellex has refused to stand down and continues to damage plaintiffs’ business,” the lawsuit said.

Stellex, meanwhile, has asked a judge to dismiss the case, arguing Whalen and Pekmezovic formed Great Mill Rock while employees of Stellex. Stellex owns the Mill Rock trademarks and therefore could not have committed trademark infringement, among other claims, according to its request for dismissal.

“This is a straightforward case of an employer/employee relationship gone sour,” Stellex said in the document.

Spokespeople for Stellex and Mill Rock declined to comment.

New strategy

The two sides started with a lot of promise, as Stellex held talks with Whalen and Pekmezovic to join the firm and launch a credit strategy. Whalen and Pekmezovic at the time had been working at another emerging manager, Gamut Capital Management.

The two executives said around the same time talks with Stellex were going forward, they were planning on launching their own independent funds called Mill Rock Capital.

In February 2018, they created trademarks and a logo for Mill Rock Capital, the lawsuit said. In August 2018, they formed a legal entity called Great Mill Rock with the knowledge and support of Stellex, which agreed to pay for legal representation in the formation of the firm, the lawsuit said.

Whalen and Pekmezovic formed Great Mill Rock to serve as a vehicle through which they could assess potential investments and hold their economic interests while in negotiations with Stellex, the lawsuit said. They also were in the process of registering intellectual property and the trademarks in the Great Mill Rock name, the lawsuit said.

They formed Great Mill Rock even as they negotiated with Stellex to launch a credit strategy within the firm. Whalen and Pekmezovic said the Stellex partners assured them they would be able to raise more than $250 million for a fund, including with anchor backing from New York State Common Retirement Fund, the lawsuit said. The Stellex partners also allegedly told Whalen and Pekmezovic that GCM Grosvenor would be able to bring in clients to the fund, the lawsuit said.

Spokespeople for New York State Common and GCM Grosvenor declined to comment.

Around March 2018, Whalen and Pekmezovic signed what they call a non-binding memorandum of understanding with Stellex that they would lead the new strategy, subject to final terms, the lawsuit said. The credit strategy was first envisioned as Adirondack Credit Management, but was eventually to be called Mill Rock Capital after Whalen and Pekmezovic said they granted Stellex a “limited and revocable license” to use the trademarks under their supervision, the lawsuit said.

Whalen and Pekmezovic said they also agreed to an interim arrangement with Stellex in which they would help the firm raise funds for the new strategy, create marketing materials and recruit a team, in exchange for payment from Stellex.

Stellex argues this language and said the two simply worked for the firm under terms governed by the memorandum of understanding, the only actual documentation detailing the relationship. Whalen and Pekmezovic claim that the interim agreement and the limited license were oral agreements, the lawsuit said.

“Plaintiffs now want a ‘get-out-of-contract-free’ card and claim the MOU was ‘non-binding’,” according to Stellex’s filing. “That allegation is not only conclusory but academic: whether binding or not, the MOU contains three facts which foreclose plaintiffs’ claims here: [they] were employees of Mill Rock; Stellex owned Mill Rock; and the parties nowhere agreed that plaintiffs would own the trademarks which they used as part of their ‘branding’ responsibilities in the MOU.”

Whalen and Pekmezovic claim they performed their side of the interim agreement, recruiting a team and creating marketing materials, the lawsuit said.

During this period, Whalen and Pekmezovic completed three investments that they had sourced, assessed and negotiated, the lawsuit said. The deals were Grammer Industries, Cisco Industrial Services and Venture Metals. Stellex had the opportunity to participate in the deals, the lawsuit said, though declined to participate in the Venture Metals transaction, the lawsuit said.

Stellex, though, did not grant Whalen and Pekmezovic an ownership stake in Mill Rock Capital Management and failed to devote significant time and resources in raising the fund, the lawsuit said. Eventually the fundraising process was halted and Stellex decided to not launch the credit strategy, the lawsuit said.