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Source: DryShips

If you want the secret to wealth beyond your wildest dreams, all you have to do is figure out how to become the CEO of DryShips (NASDAQ:DRYS). Sure, the company's stock is down over 80% since its IPO, but that hasn't stopped CEO George Economou from raking in more every year from related-party transactions than most CEOs could imagine making in a lifetime. 

Related party like its 1999
What's a related-party transaction? The short version is that they are company transactions involving somebody that is connected to the company, such as an insider. They therefore have the potential to be biased in a way that is unfavorable to DryShips' shareholders, since there is a possible conflict of interest.

An example would be if the CEO of a burger chain made a deal with a beef supply company that he also owns. These types of transactions must be disclosed in SEC filings as a warning to investors. The reason is that, using the burger chain example, the CEO might be biased and unmotivated to negotiate the best possible deal for his shareholders. He may overpay for beef to create a cushy profit for himself at the expense of his burger chain's shareholders.

"Fees" a mile long
The list of related-party transactions listed in DryShips annual report seems to be a mile long. The name "George Economou" keeps popping up with many of them as well. He owns or controls several companies such as Cardiff Marine, TMS Bulkers, TMS Dry, and TMS Tankers. DryShips also does business with a number of related-party companies that Economou's close family owns. Even some of DryShips' office space in Athens was previously leased from Economou's son.

The annual report warns, "In particular, TMS Bulkers or TMS Tankers 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."

DryShips pays many of these companies "management fees," commissions, "consultancy fees," and similar payouts. Total related-party transactions just for "fees," including stock-based compensation to Economou, was over $76 million for 2013 alone. Not a bad gravy train he's riding.

Shareholders last?
After the IPO, DryShips had around 30 million shares outstanding. Fast forward to now, and the number has ballooned to over 432 million. That's a staggering increase of 1,440%! DryShips has diluted common shareholders seemingly recklessly while making sure that Economou's businesses are well taken care of.

The self-dealing has been going back and criticized by others for many years. Back in 2007, Peter Georgiopoulos, CEO of Genco Shipping & Trading, referred to DryShips as "the guys who play games with their shareholders' money." Hedge fund manager Steven Abernathy once said, "I believe he runs DryShips as if it's his own private company."

Investors generally prefer CEOs who align their interest with the interests of shareholders. Economou has quite an incentive to keep making transactions and keeping liquidity -- no matter where the source -- flowing into the company so the "fees" can keep on growing.

Are the terms with his entities better or worse than the terms DryShips would have with other, unrelated companies performing the same services? Who knows. DryShips has racked up a lot of debt, though, and relies on its leniency from its creditors in the form of waivers to stave off bankruptcy. If the company's creditors share these concerns, then DryShips may see rough waters at the negotiation table.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.