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DryShips – Securities Investigation

DryShips – Securities Investigation

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Class Action Lawsuit Filed Against DryShips

A class action lawsuit was filed in United States District Court, Southern District of New York, on behalf of a class of investors who purchased or otherwise acquired DryShips’ securities, seeking to recover damages caused by DryShips’ (NASDAQ:DRYS) violations of the Securities Exchange Act of 1934.

The lawsuit alleges that between June 8, 2016 and July 12, 2017 (the “Class Period”), DryShips made materially false and misleading statements regarding DryShips’ business, operational and compliance policies. Specifically, DryShips made false and/or misleading statements and/or failed to disclose that: (i) DryShips engaged in a systemic stock-manipulation scheme to artificially inflate DryShips’ share price; (ii) DryShips’ transactions with British Virgin Islands firm Kalani Investments Ltd. (“Kalani”) were an illegal capital-raising scheme, due, in part, to Kalani’s failure to register as an underwriter with the SEC; and (iii) as a result of the foregoing, DryShips’ public statements were materially false and misleading at all relevant times.

The Wall Street Journal Reports About DryShips’ “Bizarre Stock Maneuvers”

On July 13, 2017, The Wall Street Journal published an article, “A Shipping Company’s Bizarre Stock Maneuvers Create High Seas Intrigue,” which, among other things, reported:

When a company’s stock drops 99.9% in six months, there’s probably a story there. When, despite that carnage, the company’s assets double during the same period, even more so.

And when 1.68 million of the company’s shares held early last year equal exactly one share today, well, what is going on?

The locus of these bizarre doings is DryShips Inc . . . a Greek carrier that has been tracing one of the wildest rides in recent stock-market history, causing half a billion dollars of traders’ money to vanish and, it appears, making two wealthy men wealthier.

DryShips’ shares occupy a murky world of tiny stocks where information is limited and investors often bet on short-term moves. Worth barely $5 million on the stock market in early November, the company became a hot topic on stock discussion boards when its shares suddenly leapt 1,500% in four trading days.

That the company had just disclosed a huge loss and suspended debt payments “to preserve cash liquidity” evidently didn’t matter to buyers who wanted in while the stock was on fire.

But even as they were buying, the company was creating vast numbers of new shares. These it was selling at a discount to an obscure British Virgin Islands firm, which was quickly unloading many or all of the new shares.

. . .

Since then, DryShips has repeatedly printed huge numbers of new shares and sold them to the British Virgin Islands firm, on such a scale that virtually every share in existence today has been created since November.

In an apparent effort to counter the downward pressure that this new supply of shares put on the price, DryShips used another technique: reverse stock splits.

. . .

On June 8, 2016, DryShips sold Kalani securities convertible into $5 million worth of new DryShips common shares, which was equivalent to a little under 10% of the shipping company’s market value then. It was a small foretaste of what was to come.

Kalani didn’t report a 5% or more stock ownership, as U.S. regulations require, indicating it rapidly sold many of these new DryShips shares. And in succeeding weeks, DryShips’ stock tumbled.

By September, DryShips was preparing paperwork to do two things: execute a reverse stock split and issue a far larger batch of securities to Kalani.

Issuing so many new shares would normally be unrealistic for a company with a tumbling stock, but on Nov. 9 DryShips’ stock suddenly tripled, ending the day up 133%. Nasdaq temporarily halted trading four sessions later with the stock up 1,500%.

. . .

When trading resumed two days later, DryShips announced it was selling a second batch of securities to Kalani—securities the offshore firm could convert into $100 million of new DryShips common stock.

That was nearly 20 times what the entire company was worth before its stock’s mysterious rally.

DryShips gave no information about Kalani in securities filings or public statements when it sold the firm shares, except to say that Mr. Economou wasn’t affiliated with the firm. Details of Kalani’s ownership are protected by secrecy laws in the British Virgin Islands.

. . .

Even so, investor chat rooms lit up with speculation that another epic rally could be in store, given the sudden inflow of cash to the company’s coffers. Mentions of DryShips on an investing site called StockTwits, which had totaled only about 77 a week before the November rally, soared to an average of about 18,000 a week over the following four months.

The enthusiasm allowed DryShips to create and sell still more shares. In three additional deals with Kalani, the shipper agreed to sell it securities convertible into $626.4 million of new DryShips common shares.

That was equal to about 100 times DryShips’ stock-market value in early November.

To keep its stock price from falling below $1, necessary to avoid delisting, DryShips kept doing reverse stock splits—not only one on Nov. 1 but also one on Jan. 23, one on April 11, one on May 11 and one last month, on June 22. All had the approval of Nasdaq, where the stock trades.

The Wall Street Journal also reported that

[l]egal experts said the quick sales raise questions for regulators.  “If [Kalani is] buying it with the intent to resell, then they’re acting as an underwriter and this is a public offering,” said Jill Fisch, a University of Pennsylvania law professor who specializes in securities regulation.  In an underwriting, a licensed entity, normally a bank, sells shares to the public and gives the proceeds to the company.

James Angel, a financial-markets expert at Georgetown University, said the deal sounds like a “pseudo-underwriting.”

Kalani isn’t registered the . . . Securities and Exchange Commission as an underwriter.  That means it is possible “both the company and the intermediary are on the hook for violating securities laws,” Ms. Fisch said. 

. . .

The tens of millions of new DryShips shares created have hammered long-term investors through stock dilution on a grand scale, since far more shares now have a claim on the company.

Investors who bought DryShips[‘] shares last fall and held on have lost almost all of their money.  A $10,000 investment in DryShips stock at the beginning of November was worth $167,000 two weeks later, during the brief price spike, but only about $2 today.

Splash24/7 Reports DryShips Named Defendants in High Court Action

On July 5, 2017, splash247.com reported that “DryShips and its chairman and chief executive officer George Economou have been named as defendants in a lawsuit filed in the High Court of the Marshall Islands which alleges breaches of fiduciary duty, unjust enrichment, and conflict of interest.”

Further, splash247.com reported that “[i]n May, DryShips was deemed the worst listed company for corporate governance in a regularly updated poll carried by investment bank Wells Fargo and its equity analyst Michael Webber.

Do You Own DryShips’ Securities?

If you purchased or otherwise acquired shares in DryShips and would like to speak privately with a securities attorney to learn more about the investigation, fill out the form to the right or contact John Kehoe, Esq., (215) 792-6676, Ext. 801, [email protected]; Michael Yarnoff, Esq., (215) 792-6676, Ext. 804, [email protected]; or send an e-mail to [email protected].

About Kehoe Law Firm, P.C.

The Kehoe Law Firm, P.C. is a multidisciplinary, plaintiff–side law firm dedicated to protecting investors and consumers from corporate fraud, negligence, and other wrongdoing. Driven by a strong and principled sense of social responsibility and obtaining justice for the aggrieved, Kehoe Law Firm, P.C. represents plaintiffs seeking to recover investment losses resulting from securities fraud, breaches of fiduciary duty, corporate wrongdoing or malfeasance, those harmed by anticompetitive practices, and consumers victimized by fraud, false claims, deception or data breaches.  Together, the partners of the Kehoe Law Firm, P.C. have spent more than 30 years prosecuting precedent-setting securities and financial fraud cases in federal and state courts on behalf of institutional and individual clients.