Marc4: That is an interesting article. The point it is that savvy short sellers look for companies that commit fraud and attempt to profit from it by short selling the stock. If they have uncovered fraud, then it is valid to bet that the stock price will go down. Short selling is a very risky, but valid way to invest in the market.
Is this any different than those who look for companies that have a potential new development, that if successful would make the price rise and place a bet on the stock? That can be just as risky, especially if the potential of the new development was exaggerated.
Here's an excerpt from your article:
But short sellers can be the market's first line of defense against corporate fraud. Jim Chanos, who runs a short fund called Kynikos (Greek for cynic), uncovered Enron's fairy-tale earnings months before internal whistle-blower Sherron Watkins. David Tice, another prominent short seller, was vilified by Tyco International for years before his warnings of accounting shenanigans were vindicated. Many, like Asensio, are now turning their sights on health care providers they suspect of pumping up earnings by stealing from federal taxpayers via Medicare.
In the case of e.Digital, those who do thorough due diligence can see that the company in is in extremely grave financial condition and is relying on selling shares and using shares to pay bills just to stay in business. The company and its auditors warn that there is only enough cash for two months and that there is substantial doubt that it can remain a going concern. The company has also issued another round of death-spiral (floorless) convertible financing that will cause further dilution and a reduction in share price.
In this case, short selling EDID stock might be a valid investment. However, it is extremely difficult to short sell an OTCBB stock like EDIG. One needs an off-shore account to do so, the excuse that massive short sellers are artificially reducing the share price is not valid.
I do believe there has been short selling of EDIG stock, but by culprit is most likely off-shore entities associated with e.Digital's financiers. The company invites the fox into the hen house and gives them incentives to short sell.
Do not forget that the same entity that owns the floorless convertible preferred shares is the same entity that is the usual buyer of shelf stock. Since the conversion price of the Series D Preferred Shares can be lowered if shelf stock is sold below the existing conversion price (currently .19), Davric (and related entities) has an incentive to short sell before covering with shelf stock. The lower the purchase price of shelf stock, the lower the conversion price and the more diltion that occurs.
So, if you are concerned about short selling in EDIG stock, you should look to the most likely source.
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