Flaherty Financial News Newsletter #33
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OVER 100% OF DIMI'S FLOAT SHORTED!

DiMi Telematics stock collapses 99.5% in a bear raid! Under a deluge of UNBELIEVABLE short selling volume over 100% of the public float is shorted. Whodunit?                                  August 1, 2012        

Bob Flaherty Rides Again! Welcome to our 33th Flaherty Financial News Newsletter. If you have not already done so, please join our financial family. Simply go to our website www.flahertyfinancialnews.com and opt in as a reader to receive your next FREE issues of Flaherty Financial News and also Flaherty Special Situations. You can opt out any time.

 

Marquis of Queensberry Rules!  Only my oldest fans will remember that I led and conducted a three decade crusade, campaigning to reform abusive short selling. I have written or edited over 100 articles on short selling and bear raids. In past stories like "Hope for the Horrible Example" defending Digital Switch Corp. up 10,000%, SafeCard Services up 1,073% and Pre-Paid Legal Services up 305% I took on almost the entire big time U.S. media. On each of them I  was proven right.  Unfairly  battered  under ruthless abusive short selling attack, these vindicated stocks  soared.

 

Other times the shorts were  right and killed their target. Most contests ended in a split decision. But just engaging with opponents with trading nicknames like "Killer" , "The StockBusters" or "The Mortician" not to mention handles too vulgar to repeat filled me with a strange energy. The danger made me feel alive. It's fun to test yourself against the best.

 

There is nothing wrong with legitimate short selling.  A short seller who exposes a fraud is doing a public service and I have saluted many friends for doing just that. But then there are the proactive abusive short sellers who besides simply shorting can't wait for events to take their natural course. Instead they interfere with operations or financing or spread lies so they do a whole lot more than just short selling.    

Abusive short sellers, especially in a bear raid where there are indications of illegal naked short selling, often practice what I call "Financial Euthanasia." They simply assume a company can't make it and try to kill it quickly. But often they do it with tactics which are as bad as or worse than those of the bullish promoters they criticize. Once I wrote a story asking "Where are the good guys?" In that award winning story I concluded there weren't any on either side.

 

In the exciting clashes, I had the thrill of winning major journalism awards and testifying before Congress fighting for reforms which were later adopted. Even more importantly I felt honored to be credited by NASDAQ's first president Gordon Macklin for many basic shorting reforms. One of the most important was as basic as calling for the  monthly reporting of the short positions on public companies.

 

Really? When I started to push for change the short position in most stocks was not disclosed to the public and the entrenched resistance to doing so was powerful. During a raid, shady shorts would lie and claim  their huge positions didn't exist while management  over estimated them. When regulators did start publishing the numbers the truth, as it usually is, was somewhere in between. But the sunshine of exposing the short positions monthly improved and cleaned up the market immensely.

 

My greatest battle was fighting to curtail powerful networks of naked short sellers. Naked short selling is illegally making short sales without first borrowing the required shares. As I explained many times this enables rule breakers to sell shares that don't  exist to the public. By trading among different accounts and not delivering shares on time abusive shorts know how to create an unlimited number of phantom shares. In the old days naked shorts made a mockery out of the delivery rules. A few  failed  to deliver shares they had sold and been paid for  as much as  60 days late because of the complicity of the brokers and clearing agents who were profiting for the short's  trading volume.

 

Naked shorting is incredibly profitable. Imagine if you could get money by selling  something that didn't exist!  And the selling  of phantom shares also knocks the stock price down so the abusive short seller's own position profits even as the victimized buyer is harmed as his shares fall further.

 

Few companies can withstand a selling deluge of bogus phantom shares, usually accompanied by a smear campaign designed to kill the company as quickly as possible. Wisely, SEC reformers created Rule SHO in 2005  to prevent such unethical traders from engaging in naked short selling and related practices. SHO requires reporting all fails to deliver on time and spotlights the worse current offenders. Improvement in delivery of borrowed shares was dramatic. The number of target companies on the fails to deliver list shrank and so did the most extreme late share deliveries.

 

A few years ago I took a bow. When I was bending over someone should have given me a boot. That crusade against abusive short selling and especially naked short selling is still unfinished. I really thought we had wiped out most naked shorting. Instead a new group of  youthful brilliant  bear raiders is steering  "trading students" to set up off shore accounts in the Bahamas. These accounts allow much  more leverage and escape regulation from U.S., Canada and Europe. They can also be used   to attack stocks of companies back here in the U.S.A. with the cooperation of clearing  firms and others based here in the U.S. It's scary!

 

I'm not saying that penny stocks should not be shorted. I am saying that bear raiders who do it should play by the rules. Those who don't and engage in illegal naked short selling should be exposed by the SEC's forensic accountants and kicked out of the brokerage business along with all those who enable  them to do it.   

In the past before the SEC cleaned up the prior naked short selling mess a thousand  young companies were crippled or destroyed and thousands of jobs and even some  vital medical breakthroughs were ended or delayed. 

The SEC and FINRA should go after any law breakers now and nip any overshorting abuses in the bud. Otherwise the specter of naked short selling will return to cripple our markets and drive even  more individual investors away from investing in stocks.

 

The  massive bear raid is on at DiMi Telematics International (DiMI), which was featured as a Buy in our last Flaherty Special Situation #30, is a disgrace!  Over 100% of the public float has been shorted. The percentage of short selling to total trading on some days has been obscene. Someone has been cheating. The investors who have been hurt include many of  the little guys.  

Wise guys always find a way to get around the protective rules and regulations the SEC and FINRA have created to protect the investing public and also to protect speculative traders from themselves. Timely alert regulation now can prevent  much larger  fiascos in the future.

 

My dear old dad liked to take me to see boxing matches in Boston. We Irish love a good scrap. Marquis of Queensberry Rules! No biting or kicking allowed. Take a front seat with us and read all about it.-RJF

OVER 100% OF DIMI'S FLOAT SHORTED!

 

DiMi Telematics stock collapses 99.5% in an abusive bear raid! Under an UNBELIEVABLE  volume of short selling  over 100% of the public float is shorted. Whodunit? Failure to deliver (naked short selling) in DiMi stock already has become an issue, according to Buyins.com.

 

 By Robert J. Flaherty

 

On June 15 I picked DiMi Telematics International (DIMI-0.03) as a strong buy at $0.84 and was also featured in a promotional MagaLog. As disclosed in our own newsletter disclaimer, Flaherty Financial News Inc. received a check for $15,000 to feature DiMi in our Flaherty Special Situation #30 from a third party Cloud Focus Group.

 

Earlier my son Brian and I went to the  Harlem, N.Y. -based Fata family's   real estate office to interview  co-founder and DiMi system creator Roberto Fata. After a lengthy interview Roberto demonstrated how his DiMi system could monitor and control office buildings from any place at any time. We walked through the halls as Roberto varied the positions of  his mobile devise to put on a show.

 

While being the property manager for his dad's large commercial real estate business in Manhattan, Roberto needed to travel to indulge in his passion for car racing. He dreamed  of becoming a champion. He did it  in 2008   becoming the North American Ferrari Challenge champion.

In between out of necessity Roberto created his unique DiMiSpeaks software and a two way DiMi M2M service enabling service communications hosting platform. DiMi software is hardware indifferent which he believes  is very important. It is also patent pending.

 

Earlier on October 19, 2010 The New York Times wrote a delightful article "A landlord learns from his son" The writer described how Roberto showed his father that by installing sensors in each of his properties he no longer had to go from building to building with a piece of paper and pencil in order to monitor his each one. He could monitor his properties remotely by using a computer or mobile phone. That year, Roberto installed water sensors to show when toilets were backing up, temperature sensors in every living room and oil sensors to provide evidence if a delivery was 200 gallons short.

Roberto, who discovered that he had a talent for tinkering with things when he was a child, saw the enormous cost-savings potential that could be generated by the sensors that he developed a web-based system around the sensors and called it DiMi. "Dimmi" means "tell me" in Italian. He developed the DiMi solution so that it's able to capture and integrate real-time data from virtually all of the standard networked control systems, sensors and devices.

The DiMi solution is now actively monitoring property management systems in seven of Fata's commercial and residential buildings in East Harlem, NY - all beta sites which have served to successfully prove the technology and M2M communications platform. Fata family private residences elsewhere are also being monitored with good results.

 

Subsequently, Roberto has put in over $6 million to constantly improve his DiMiSpeaks software system. We were impressed and came away liking what we saw.  We thought this brand new DiMi start-up had a good chance, especially in the huge commercial real estate market.

 

Before I issued our Flaherty Special Situation #30 on DiMi at $0.84 I expected the stock would fluctuate, but I naively figured that the crucial period for the company's success or failure would come in the first half of 2013. That is   when the DiMi M2M service enabling service  system now being upgraded from the test stage and being stylized is scheduled to go commercial in mid-2013.

This debt- free developmental company already had the money in the bank to complete the task. The critical points would be whether outsiders wanted to use and to buy the new improved DiMi M2M system. If so, the next  key challenge would be whether management could raise a few million in new capital to staff up for marketing. If not, the start-up would  fail. These are problems common to many new companies.

 

Then a savage  bear raid with naked short selling started! After soaring up 133% to as high as $1.96, partly inflated due to short seller buying and covering, DiMi stock collapsed 99.5% to as low as one cent.   

I was as surprised as you when on Monday July 16  DiMi stock plunged 77.8% to $0.08 on huge volume in just one day.  Yahoo.finance   showed 10.5 million more traded on Tuesday, 32 million on Wed. 14.6 million on Thursday and 10.5 million on Friday. So during that week over 77 million shares were traded. The following week another 58 million shares traded. For the two weeks share turnover was about  388% of the public float! That is crazy.

 

Most of the classy brokers won't permit customers to short stocks under $5 so there has been very little attention by journalists or regulators about what is going on  in this most speculative and dangerous part of the micro-cap stock market. Besides  the SEC has put in protective rules to make shorting mini-priced stocks and dangerous day trading shorting of  them more limited.  I  didn't think a new problem of naked short selling could pop up here. As the crazy explosion of short selling proved, boy, was I wrong!  

   

BuyIns.com  warns fails to deliver the required  borrowed shares have already become a problem in DiMi. There are about 327 million shares outstanding adjusted for a 100 million share give back covered in a press release. No shares owned by insiders or investors have had their restrictive legends removed. The only free trading shares that exist are the 35 million from the previous shell but 38 million shares are short.  That is 108% of the float! Without illegal naked short selling how could more stock than exists in   the float  be shorted? I can count! So can you. Someone is cheating.  

 

For tiny start-ups like DiMi short selling pressure including shares which don't exist can destroy a start-up's  stock value overnight. Of course, bear raiders typically blame the promoters and insiders (including those whose shares are locked up) for most of the selling. However, entrepreuners  have no incentive for shares to get pounded down to almost zero. They want  shares to go up so they can raise more seed capital and  make acquisitions. Most of the downside selling and shorting comes from  short sellers.

 

In his online article "DiMi Stock Scam"  trading educator and bear raider Timothy Sykes disclosed that he had been trading in DiMi both long and short. He also disclosed to the reader/pupils of his four short -oriented newsletters he was shorting and in a few words made DiMi appear to be a joke.

 

After the stock crashed, Tim crowed DiMi was his best short call ever. With over 100% of the stock short no wonder!  

 
Let The Sunshine In. 

Also Tim copied one of our disclaimers and then asked for more information. What a hypocrite! One early posting of his online article did not show a disclaimer at all. In a recent update if you click on his own disclaimer it does not tell you much. What about disclosing the size of his own shorting? What about more disclosure of the extent of the trading coming out of his affiliates who pay him fees? Not to mention how many shares are being shorted offshore. Let the sunshine in.       

 

He is affiliated and receives fees from brokers who will handle the shorting of mini-priced stocks. Questionable  techniques he suggests or are  referenced in  the online material from his affiliates  are criticized  in an  older online article "Timothy Sykes-Watch Tim Sykes Scam exposed in my review" by pennystockalerts.com.

 

If you have read one of these still posted "scam" articles, I suggest you read the other for balance. Together they create a fascinating, fuller and fairer overview. Skip the one calling Tim a cancer. That is too extreme for me. Marquis of Queensberry rules!

 

Tim wrote his main reason for shorting DiMi was that DiMi's investor relations firm was headed by a lady, whom Bob Flaherty has never spoken to or met. Tim stated that this lady had been involved in many previous penny stock promotion campaigns where the stocks crashed and notorious figures were involved. 

 

Her current online photo reveals she is an attractive red head. Instead Tim's piece included a mug shot of her  from a routine old SEC filing where alas she looked like a young girl who had just been nabbed for shoplifting and was  as upset as she could  be. (That's no way to treat a lady!)  He listed only powerful  negatives. Using guilt by association, he dammed DiMi mainly because her firm was listed as its IR contact. The panic was on.

 

The penny stock promotion market offers a rich field for short selling. Besides often having too many shares and being overpriced, many  penny stock start-ups lack proper financing and good management. In addition these tots face  all the other hurtles new companies face.

The majority will fail. Buying penny stocks  is a form of gambling and not where 90% of an investor's money should go. Still, like lottery tickets  there will be a few spectacular winners and also a lot of  limited successes.  

New enterprises are fun. I like to at least wait to see what happens when a start-up company reaches the commercial stage before I decide if it will make it or not. Others are not so patient.

 

One is Tim Sykes. He won early fame by starting a hedge fund which skyrocketed and  then collapsed spectacularly because of liquidity problems. Because of his failure to appreciate risk, he was rudely disinvited to a "30 Under 30 Party" as his fund lost 35% of its value. He had to shut it down. Now around 31, he has turned into an online guru and penny stock newsletter short selling newbie trainer. Besides his own trading, he makes his money by selling  instructional DVDs and from  four online bearish newsletters plus undisclosed fees from affiliated brokers.

 

BUYER BEWARE 
But has Tim learned anything? Currently Tim is steering his trading pupils toward higher risk and to set up accounts offshore.He recommends using one of  his affiliates, Guy Gentile's SureTrader as "the new best broker for shorting penny stocks."

 

A serial entrepreneur Guy Gentile has founded a number of high frequency, black box  and day trading firms. Clients of SureTrader and its parent Swiss America Securities Ltd. are offered  an edge over domestic accounts at his U.S. trading firm SpeedTrader based in Carmel, N.Y. The little lambs ( or are they little wolves?) can avoid many of the trading and shorting rules not only of the SEC, but of Canada and Europe. But is it better in the Bahamas? These offshore high- leverage, low -minimum accounts also lack SIPC protection if the dough in your account suddenly disappears. Buyer beware!   

 

As a Bahamian- based operator licensed as a broker dealer and investment advisor by The Securities Commission of The Bahamas SureTrader clients are not subject SEC's Patent Day Trader Rule which prevents investors with less than $25,000 from performing more than three trades in any five day rolling period. Another advantage Gentile offers in Bahamas is the "wide margin or leverage." In Canada you can leverage: 3 to 1, while in the U.S it's 4 to 1. He offers his clients an edge of 6 to 1 and a new product called Flexi-Leverage  will give clients a scary 20 to 1 leverage.

 

SureTrader permits Joe Six Pack to trade more often starting with a minimum balance as little as $2,000 and to pay lower prices to short shares versus the "regulation strapped" firms here in the U.S.      

Check this out: SureTrader's "offshore environment"  allows clients to get around the "pesky rule" of shorting stocks under $2.50 a share." U.S brokers are required to charge you $2.50 to short a stock under $2.50 even if it falls to a penny or lower.That sure discourages dangerous excessive speculation.   SureTrader drops that $2.50 to $2. This allows you (Oh, thank you God) to short more than 1/5  than you could have with a "regulation strapped" U. S. broker.

SureTrader clears through multiple firms allowing them to find shares to short on many difficult to borrow stocks where other brokers fail. Hmm. How do they do that?  

 

In volatile up or down markets high leverage can make you feel like a genius. But stock markets can and do change direction overnight. When the market gets hot and everything goes up it's the overleveraged bear speculators who pay the price. As Tim Sykes affiliate short-selling enabling networks grow larger they will inevitably become less nimble and more vulnerable. With growing success the bear raiders will need to attack larger companies to put the ever increasing amount of bear money to work.

Tim and Guy's  network enables Tim's  trader pupils to set up offshore accounts and then come back and attack U.S. companies. If they can successfully side step the rules,  others will imitate them. At some point the  sleeping regulators will wake up. I may be wrong. In the past I often turned out to be right. 

 

In the sound and fury of a bear raid, the underlying target company is often overlooked. It  takes time to build a company. This DiMi start-up is just out of the gate and has stumbled under the short selling attack. Co-founders financier Lyle Hauser, Chairman Barry Tenzer and entrepreneur Roberto Fata, whose combined shares are still locked up, remain  determined to make the DiMi system work. Clearly most of the trading on the upside and certainly in the short selling on the downside during the week of July 20 did not come from them. Operationally the system is still on schedule to go commercial in the first half of 2013.

 

The co-founder trio thinks DiMi is in a good spot to defend itself and survive this bear raid. DiMi has sufficient funds to update and stylize a commercial model. It has no debt, cash of about $888,000 and a current ratio of 60 to one. Assuming the DiMi upgrade succeeds and people want it, the team should  be able to raise the few million needed to staff up for marketing. DiMi may not be able to use shares to finance if its stock is still excessively low after the battering but there are other ways.

 

We will simply have to wait and see if managment has the ability and guts to   go commercial and  prove DiMI can perform in the real world just like every other baby new enterprise. The old timer's definition of how a concept company becomes a real company is still true today. A new company must generate sales and profits and then repeat the profits the following year. There are no shortcuts. I still think the DimiSpeaks Software has a chance.

 

Today DiMi stock is  down 95% from my Buy at $0.84. Readers would have been better off if I had picked another stock. No excuses. I struck out. Sorry folks. -RJF.

 

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Disclaimer and Safe Harbor Statements

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Disclaimer: This Flaherty Financial News Newsletter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, and actual circumstances, events or results may differ materially from those projected. We caution readers not to place undue reliance on any forward-looking statements and to supplement this newsletter with specific company SEC filings and their own research. Please be aware that there is risk in every company stock that you buy. Coverage or other mention of a stock in this newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. We are not investment dealers or investor advisers registered with the SEC or State Security Authorities. We do not guarantee all the information in this newsletter is correct or will be updated. Remember some errors are inevitable. Reproduction without written permission is forbidden. No individual at Flaherty Financial News Inc. is a shareholder of DiMi Telematics International, Inc. featured in the article in  this Flaherty Financial News ,and our policy forbids editorial from buying or selling a featured stock until this issue is out at least ten business days after its issue date of August 1,  2012. We did not receive any fees for writing about this bear raid but did so as a public service and to report our scoop that over  100% of the public float had been shorted. Earlier  Flaherty Financial News Inc. received $15,000 in cash from a third party Cloud Focus Group for an editorial writing fee and online distribution for featuring DiMi in our Flaherty Special Situation #30 on June 15, 2012. In cases where a special situation  report or profile is subsidized, readers should consider such subsidized articles as paid advertorials and understand that sponsored material will not be as objective as non- sponsored editorial. As Flaherty Financial News editor I always reserve "Final Copy Responsibility" on what to include and what to leave out of every issue. The buck stops here. We have tried to be objective, but may have failed. We are not security analysts or stockbrokers engaged in buying or selling, but financial journalists with all the many failings of that profession. You readers must decide the merits of each company yourself and whether to invest. -Bob Flaherty, Editor

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Flaherty Financial News and Flaherty Special Situations are not registered as broker dealers or investment advisers with the U.S. Securities and Exchange Commission or any state securities authority. Our newsletters and their information and content providers make no representations or warranties of any kind in connection with the subject matter, performance or suitability of the information contained in the publications for any purpose and are not liable for the timeliness, accuracy or completeness of the information. The information is provided for general information purposes and is not a substitute for obtaining professional advice from a qualified person or entity familiar with your personal circumstances. Please seek the help and advice of professionals as appropriate regarding the evaluations of any specific security, report, opinion, advice or other content. FFN is not responsible for trades placed by recipients. All opinions expressed, information and data provided are subject to change without notice. FFN, its officers and its employees may have positions in and may from time to time make purchases or sales of the securities discussed or mentioned by FFN. (However, we will avoid front running and the buying or selling of any security about to be discussed until ten business days after our particular report is released to the public.) FFN shall have no liability for any newsletter that is lost, intercepted or not received in a timely manner, or not received at all, for any reason.-RJF

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