A US federal judge has soundly rejected securities-fraud allegations against Greek shipowner Top Ships and financier Kalani Investments, ending a shareholder lawsuit designed to achieve class-action status.
In tossing out the suit against Evangelos Pistiolis-led Top Ships, US District Judge Brian M Cogan also ruled there would be no opening for the plaintiffs to lodge a revised complaint.
The lawsuit had been one of three focused on financing of Greek shipowners by Kalani, a firm based in the British Virgin Islands and controlled by Toronto-based Marc Bistricer and his hedge fund, Murchison Ltd.
In the case of Top Ships, the plaintiffs were alleging that through share sales and a reverse stock split the company and Pistiolis had profited while eliminating shareholder value.
However, in granting the motion to dismiss, Cogan said the shipowner and its financiers had fully disclosed actions in public filings with the US Securities and Exchange Commission.
“Defendants’ main argument – and it is a good one – is that this conduct was not manipulative because it was fully disclosed to the market, including Top Ships’ shareholders,” Cogan writes.
'Cart before the horse'
He also stressed that while the plaintiffs might not have been aware of the potential effect of the transactions on the value of their Top Ships stock, "that lack of awareness cannot be attributed to defendants".
"Because plaintiffs rely only on mere legal conclusions and speculation, and because the facts in the complaint suggest that they were fully aware of the alleged manipulative scheme they challenge here, plaintiffs have failed to state a claim for market manipulation," the judge said.
Cogan said the plaintiffs had shown a classic example of circular reasoning and had put the cart before the horse in some of their arguments.
"They have concluded that fraud occurred and employ that conclusion to argue that they have stated a claim for fraud," the judge wrote.
"But plaintiffs cannot escape the fact that 'in order for market activity to be manipulative, that conduct must involve misrepresentation or nondisclosure'.
"Every term in each transaction that they challenge in the complaint was disclosed to them."
No 'false signal'
The judge noted that in the case of a reverse stock split being contested by the plaintiffs, they had voted in favour of the move and could have sold shares profitably as Kalani had done.
"There is nothing about this alleged scheme that shows or suggests how defendants sent a 'false pricing signal' to the market," Cogan wrote.
In a second claim around misstatements and omissions by the shipowner in its filings related to the case, the judge said the "allegations simply do not play out in the facts".
"Plaintiffs’ allegations suffer from the same deficiencies identified above – they simply conclude that something nefarious occurred," the judge said. "They do not give rise to a plausible inference of fraud."
Plaintiffs had focused on the use of the word may in the documents around potential actions as misleading, but the judge said the Second Circuit appeals court had already ruled this could be understood as an action which was permitted but not required.
"But the complaint includes no facts to suggest that defendants knew with any amount of certainty that this was the case," the judge added.
"The disclosures simply put plaintiffs on notice that defendants might do what they ended up doing. That is not securities fraud."
Cogan said his decision to block the plaintiffs from filing an amended complaint was unusual.
“The problem with granting leave to amend in this specific case is that plaintiffs challenge as secretive and manipulative something that happened out in the open,” Cogan wrote in his order.
“Moreover, [plaintiffs] have included just about every relevant fact they could possibly include todescribe the events that occurred here, which they claim were fraudulent.
"Those facts do not establish a plausible inference of securities fraud, and because of the public nature of the conduct at issue, there are no further facts in existence which could provide such an inference.”
The Brooklyn court’s rejection of the fraud claims ends the legal challenge for Top Ships, even as two more Greek owners continue to defend against similar allegations in the same New York district.
Both DryShips and the former Diana Containerships — since renamed Performance Shipping — have asked federal judges to dismiss shareholder allegations relating to Kalani fundraising, offering essentially the same defences raised by Top Ships.
Kalani is said to have approached several Greek owners with capital-raising suggestions in 2016.
