As the old saying goes, fool me once, shame on you, but fool me twice shame on me. Nowhere is this saying more appropriate than for investors in DryShips Inc. (NASDAQ:DRYS), George Economou’s diabolical dilution machine.
On April 6, 2017, DryShips announced another 1- for-4 reserve stock split. This move follows the $226.4 million common stock dilution announced on the April 3rd, a 1-for-8 reverse split in January, and a 1-for-15 reverse split last November.
DryShips investors have been fooled not once but multiple times. And after every crop of shareholders is wiped out, a new herd takes its place.
Will the process ever end? Don’t count on it. Economou is not breaking any laws, nor is he forcing investors to buy stock in his company.
Who is George Economou?
Economou has been called the worst CEO in the world, but who is he really? The controversial shipping tycoon was born in Athens, Greece. He moved to the U.S to study at MIT where he earned degrees in marine engineering and naval architecture.
Like most entrepreneurs, Economou has failed several times. luckily, his failures were at the expense of others.
Economou’s first company, Alpha Shipping, defaulted on its bonds, yet Economou managed to keep most of its assets in bankruptcy court while paying lenders only 37 cents to the dollar, according to Forbes.
DryShips, Economou’s most well-known company, IPOed in 2005 and soared on the back of a sky-high Baltic Dry Index that was driven by huge demand for raw materials to support China’s booming construction industry at that time.
But even in the good times, DryShips had the unsavory characteristics of self-dealing and shareholder unfriendly management. Economou often conducts company business with himself and family members. And it is little surprise that, when market conditions became adverse, Economou continued to run DryShips like his personal casino.
When asked who is shareholders are, Economou responded “Computer models, hedge funds and some institutions that go in and make $10 and get out.”
He clearly doesn’t know or care about the human cost of his actions on regular retail investors. The controversial CEO further states “Once you have full disclosure, if you don’t like it, don’t invest.”
Although I hesitate to make a definite statement on the issue, I believe DryShips is a pseudo-scam that exists for no other reason than to enrich Economou at the expense of unsophisticated investors.
It looks like DryShips sells stock to Kalani (Economou) at a lower price than the market price of the stock. Kalani turns around and sells these shares to gullible investors on the open market for a higher price than it bought them from DryShips.
DryShips uses the money it raised from Kalani to pay George Economou’s salary, buy assets from other Economou-owned companies, and make acquisitions until it runs out of money and starts the process over again.
I believe Economou profits from this process in three ways:
- With Kalani he profits through arbitrage, selling shares of DRYS for a higher price than he purchased them from DryShips.
- With DryShips he profits by using the money raised from Kalani to buy ships from other companies he owns and expand the company.
- Economou also gets paid consulting fees and interest payments from DryShips. Remember, not only is he the CEO of DryShips, he also owns much of the company’s debt through Sifnos Shareholders – another Economou-affiliated entity.
Whose Fault is This?
Whenever DryShips dilutes shareholders, calls to sue Economou and delist the stock sweep popular message boards. But Economou – to my knowledge – is not doing anything outside the confines of the law, nor is he doing anything ‘wrong’.
Bad management is not a crime, and Economou is not forcing anyone to buy his stock. The Greek billionaire has found an easy way to make lots of money, and so long as people keep playing his game, he will continue his behavior.
While mass dilution is unusual for a NASDAQ listed company, it is actually a normal way of doing business in the OTC markets and pink sheets.But unlike pink sheet stocks, DryShips tells investors exactly what it is doing through SEC filings.
The information is out there, the precedent is out there. The real problem with DryShips is the people who keep buying the stock.