What’s wrong with making money? That is one of the central questions being asked by private financier Kalani Investments, the British Virgin Islands-based firm that has been accused in a lawsuit of making $40m or more off the $700m in financing it provided New York-listed DryShips between June 2016 and August 2017.
Kalani, controlled by Toronto-based hedge fund executive Marc Bistricer and his Murchinson Ltd, is known for secrecy.
But its lawyers have had plenty to say in asking a New York federal judge to toss out security-fraud charges raised in a prospective class-action lawsuit.
Plaintiffs' claim
“Plaintiffs’ claim against Kalani is that it provided financing to DryShips and bargained for a return on its investment,” lawyers argued in their dismissal motion.
“But there is absolutely nothing unusual or surprising about that — it is, after all, what all financiers do."
And while DryShips was struggling at the time and could not tap traditional sources of capital, it was not sympathy that governed Kalani's decision-making, according to the brief filed by Peter White, partner in Washington, DC, law firm Schulte Roth & Zabel.
“Kalani did not [provide financing] as an act of charity,” lawyers wrote. “DryShips provided the return on Kalani’s investment by issuing new common stock to Kalani at a discount, which Kalani could then sell into the market.”
While plaintiffs have alleged it was all an illegal scheme to dilute their shares and cause massive losses to the benefit of Kalani and DryShips' principals led by chief executive George Economou, Kalani’s lawyers deny there was a scheme and contend even a profit was not a sure thing.
Kalani did not [provide financing] as an act of charity. DryShips provided the return on Kalani’s investment by issuing new common stock to Kalani at a discount, which Kalani could then sell into the market
Kalani lawyer
“Given DryShips’ extreme stock price volatility, Kalani still bore significant risk in accepting discounted stock in return for providing financing to DryShips," according to the brief.
Inching towards resolution
Kalani’s filing last week, and a reply from plaintiffs opposing a dismissal, came as the case before Judge Sandra J Feuerstein in the Eastern District of New York appears to be inching toward a resolution.
A status conference on the conflicting claims is now scheduled for May.
As TradeWinds has reported, shareholders have filed three separate lawsuits in US federal courts aimed at Kalani’s financing of three New York-listed shipowners: DryShips, Top Ships and Diana Containerships.
Plaintiffs claim the owners and Kalani engaged in a dilutive stock-sales scheme, which, aided by reverse stock splits, in some cases destroyed up to 98% of shareholder value in the companies while enriching the shipowners.
All three owners have said the claims are without merit and are contesting the allegations.
DryShips and Diana Containerships have filed motions to dismiss the lawsuits. Proceedings have not advanced to that stage yet in the Top Ships litigation, as shareholders continue to dispute who should be the lead plaintiffs.
Public filings
Kalani lawyers echo remarks in a DryShips dismissal motion that all details of the financing arrangements were disclosed ahead of time in public filings, leaving DryShips' investors to proceed at their own risk.
“The ‘scheme’ plaintiffs attempt to posit here consists of this disclosed conduct and actions that…were ‘natural anyway.’ Kalani was willing to give cash to DryShips only with a reasonable opportunity for profit — no one would issue financing otherwise,” they said.
“DryShips needed the cash to support its struggling business and avoid bankruptcy, and told its shareholders how it planned to do just that while also protecting its status as a public company, for the benefit of its shareholders and itself.”
The investor plaintiffs are not backing off, however, in a response to Kalani's dismissal claim.
“There is nothing ‘natural’ about the market manipulation that occurred here,” they argued in a brief filed by lawyers with New York-based Scott & Scott Attorneys at Law.
“Kalani and the other defendants failed to disclose that the stock issuances and reverse stock splits were coordinated transactions that were part of a manipulative scheme to enrich themselves at the expense of investors.”
