Investors in DryShips (NASDAQ:DRYS) really have me scratching my head. This dry bulk carrier, which transports iron, coal, ore, and grains all over the world via its ships, only recently IPOed in February 2005, along with fellow vessel operators and 2005 IPOs Quintana Maritime (NASDAQ:QMAR), Eagle Bulk Shipping (NASDAQ:EGLE), and Genco Shipping & Trading (NASDAQ:GSTL). For the sheer cyclical nature of the industry, it strikes me as a foolish (small f) investment. Philip Durell drove this home in an excellent article last year about the dangers of investing in operators which appear, on the surface, dirt cheap.

However, DryShips is especially risky, as a careful scrutinizing of the company's SEC filings should be enough to turn any investor's hair white.

That is, if its second-quarter earnings report doesn't do the job for you already. Revenues were down 31% year over year, to $51.5 million, and net income dropped 72%, to $12.1 million. Time charter equivalent rates, a standard industry measure, slipped from $34,691 last year to $20,603 this quarter. Time charter rates for the Capesize class of ships dropped from $59,052 to $31,829 year over year.

If rates begin to return to historical levels, investors would do well to keep in mind that, from 1994-2002, the Capesize rates were rarely above $10,000. It looks like an awfully bubbly market if you ask me, even for skilled operators like Excel Maritime Carriers (NYSE:EXM) and tankers General Maritime Carriers (NYSE:GMR) and Tsakos Energy Navigation (NYSE:TNP).

However, historical time charter rates are the least of my concerns when it comes to DryShips. CEO George Economou seems to have little concern about individual investors, as former Barron's editor Kathryn M. Welling pointed out in a newsletter column last year titled "The Golden Fleece?" "It was surreal," a source told Welling in relation to DryShips' IPO. "When someone asked why he was doing the deal, here-now, [Economou] actually said, basically, 'Because Americans are the dumbest investors around, and there's lots of liquidity in this market.'"

Listen to this one, though. According to its filings, Dryships' ships are managed and chartered by a privately held firm called Cardiff Marine. Mr. Economou controls a foundation that owns 70% of Cardiff and 35.5% of Dryships. Since Cardiff is a separate entity from Dryships, Mr. Economou can then manage other ships in competition with Dryships. To quote from Dryships' 20-F filing: "In particular, Cardiff may give preferential treatment to vessels that are beneficially owned by related parties because Mr. Economou and members of his family may receive greater economic benefits."

If that is not enough to convince investors to run away screaming, perhaps the fact that management issued a special dividend of $69 million to the Economou family prior to the IPO -- which was essentially all of the company's retained earnings up until that point, leaving just $7 million in cash on the balance sheet -- will do the trick.

Still with me? What about the fact that Mr. Economou ran Alpha Shipping, a virtually identical vessel operator, into bankruptcy in 1999 while burning through $175 million in capital in less than a year. Or that the company has other conflicts of interest, such as when Economou used the capital raised in the DryShips IPO to buy five ships off his sister. It's no small wonder that management saw the need to make the distinction in the earnings release that it was purchasing carriers from "unaffiliated" parties for once.

If you ask this Fool, management like this, combined with a bubbly marketplace for vessel operators -- well, I'd have to say, add this one to the list of companies whose fair value is zero.

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Fool contributor Stephen Ellis does not own shares in any companies mentioned. You can see his holdings for yourself . Krispy Kreme is a former Stock Advisor recommendation. The Motley Fool has a steelydisclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.