George Economou’s DryShips was probably headed for insolvency and a bankruptcy filing if not for the help rendered by Kalani Investments in righting the ship.
That is one of several contentions made by Kalani in asking a judge to dismiss the securities fraud allegations against it in New York.
By providing roughly $700m in equity proceeds, Kalani made all the difference in the Greek owner’s survival, the investment firm argues in a dismissal motion prepared by partners at Washington DC law firm Schulte Roth & Zabel.
“In 2016, DryShips was a struggling company. The shipping industry in general and DryShips in particular had suffered a major downturn, so much so that DryShips had lost access to traditional capital markets. Without funding to continue its operations and replace aging vessels, the company’s future looked bleak,” the lawyers argue.
Enter Kalani and the stock purchase agreements.
“Kalani was free to sell those shares or hold them however it wished. DryShips was free to use the cash however it wished,” the motion states.
“While plaintiffs question the wisdom of DryShips’ corporate decisions — including entering into the financing arrangements in the first place — the result of this financing is visible today. Instead of filing for bankruptcy and wiping out all shareholder value, DryShips remains a viable commercial enterprise.”
DryShips closed Monday with a share price around $6.03 and a market capitalisation of about $530m. It operates a diversified fleet of 30 vessels.
Connections
Plaintiffs have failed to show that Kalani did anything wrong in extending the financing, and have not drawn the requisite connections between Kalani and backers Marc Bistricer and Murchinson Ltd, lawyers add.
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. Although Kalani bought DryShips shares at a discount to the prevailing market, there was great volatility in the stock price and the investors were not necessarily guaranteed a profit, the brief states.
“Investors with sufficient risk tolerance to buy the stock during that period were likely day traders, who bought and sold in rapid succession, hoping to take advantage of short-term price fluctuations. Kalani’s discount thus provided no guarantee of profit because the price often moved more than the discount percentage even over short periods,” the motion indicates.
The motion does not shed further light on the relationship between Kalani, Bistricer and Murchinson. But it does argue that plaintiffs have not stated any grounds on which Kalani holds legal liability.
“DryShips disclosed every development plaintiffs now complain about as each happened. In the face of these disclosures, plaintiffs proceeded to buy (and often sell, and buy and sell again) DryShips’ stock,” the motion says.
“To be sure, some walked away from that gamble with a loss. But any injury was self-inflicted. Plaintiffs must show more than a drop in price to sustain a claim here. Because plaintiffs cannot, this case should be dismissed.”
