Citron Research Reports on MDI, Inc. (NASDAQCM: MDII)

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Citron exposes the roots of deception behind an opportunistic run-up of tiny company MDI, Inc. (NASDAQCM:MDII)  This company, which until last week had traded in the pennies, was on the brink of delisting, the aftermath of years of losses and unfulfilled promises.

Background
   Revenues  Net Losses
 2006  $8.7 m  $4.3 m
 2005  $8.8 m  $4.2 m
 2004  $14.2 m  $6.3 m
 Cash  $452,000
 Total Assets less intangibles  $3.2 m
 Total Liabilities  $3.0 m

What the public saw was that on February 1, MDII announced that a previously unknown private company named Stratis Authority had entered into a “strategic financing agreement” with MDII, providing a cash infusion in the form of an above-market purchase of stock for “a price approximately 20% above the market price on the closing date”.  (Based on January’s prices, that would have been well less than 50c per share.)

http://www.forbes.com/businesswire/feeds/businesswire/2007/02/01/businesswire20070201006047r1.html

Stratis Authority’s CEO gets a seat on the board of MDII
http://www.bizjournals.com/sanantonio/stories/2007/01/29/daily37.html

Stratis Authority, which was previously nearly unknown, claimed it is part of a “billion dollar global equity fund” …but in its D&B lists 6 employees and estimated revenues of $410K.  Yet, it doesn’t stop Stratis from placing a $25m order with MDI for 2007.  The customer for whom Stratis placed this order was and is still undisclosed.

http://today.reuters.com/news/articleinvesting.aspx?view=PR&symbol=MDII&storyID=134727+01-Mar-2007+BW

Then MDI, whose paltry 2006 revenues of $8.7m were flat with 2005, suddenly is able to announce a “record-breaking” 400% revenue growth projection for 2007, based, of course, nearly entirely on the “order” from Stratis.  Hence, its stock rises, allowing it to announce it has now been rescued from Nasdaq delisting.

http://biz.yahoo.com/bw/070417/20070417006490.html?.v=1

The stock has been up over 150% as of late as the company is touting its ability to prevent another Virginia Tech incident.  It has gone as far as boldly placing the Va Tech logo on their home page (until someone had the sense to take it down last week).  This company has compounded a national tragedy by using the shootings as an opportunity to promote a stock that has never turned a profit and has dubious connections.

So who’s behind the curtain at Stratis Authority?

This tawdry tale takes us to the doorstep of one Frank M. Amodeo, a convicted fraudster who has served time in Federal Pen for previous felonious indiscretions.
http://www.bop.gov/iloc2/InmateFinderServlet?Transaction=NameSearch&needingMoreList=false&LastName=Amodeo&Middle=&FirstName=Frank&Race=U&Sex=U&Age=&x=31&y=18

Since his release, he has founded a cluster of companies under the umbrella of “Mirabilis Ventures” which posted a group of websites intended to convey the impression that a wealthy conglomerate was well on its way to taking over the known world.

But his pyramid seems to be crumbling.  Shortly after a number of high profile charity and marketing splashes, Mirabilis appears to be imploding.  Recently filed suits by several acquired business entities all claim fraud and reneging on financing commitments.  Many of these business transactions appear to involve PEO’s (Professional Employer Organization), essentially payroll middleman service bureau between a business organization and its employees.  The Orlando Sentinel reports a Grand Jury has been convened to examine charges that a Mirabilis acquisition – a PEO –  is involved in missing funds intended for the payment of withholding.

So is Stratis Authority one of Amadeo’s Mirabilis companies?  Curtain please…

This brings to our attention the peculiar terms in the 8-K documenting the agreement of Stratis’s purchase of MDI stock for 50c per share.  MDI is required to contract with a PEO of the investor’s choosing into which the purchase funds are to be deposited every two weeks.  Further, it is required to fund its entire payroll through this “PEO of investor’s choosing”.  Citron Research cannot recall a single other public company transaction with this bizarre 3rd party funding requirement.

Why would Stratis Authority, which purports to be in the security solution business, have any interest at all in PEO’s, sufficient to require funding of a multi-million share stock purchase through one?

http://www.sec.gov/Archives/edgar/data/318259/000115752307000904/0001157523-07-000904.txt

Beyond proving the link between Mirabilis and Stratis, it’s intriguing to think about the implications if in fact MDI has complied with this agreement and has in fact been processing its payroll and making tax withholding deposits into a PEO of “Investor’s choosing” – one owned and operated by Mirabilis.  This is going to get very, very interesting.

Supporting Evidence

Stratis’s Chairman James M. Vandevere is the quoted official in the stories trumpeting the Stratis / MDI strategic partnership.  Of course his name isn’t on the Mirabilis website any more.  … That would be too darned easy.  They’ve taken down most of the names by now.  No biographies…..no video profiles.

But if you look back at how their website used to look, there he is as Mirabilis’s “EVP of Operations” in December 2005  :  James M. Vandevere.  The same James M. Vandevere who has earned a seat on MDII’s board of directors, and the link to their $25 million order.
http://web.archive.org/web/20051217091323/www.mirabilisventures.com/people.html

Still think there’s no connection between Mirabilis Ventures and Stratis Authority?

Want a third source?

Is Stratis a division of a “billion dollar” enterprise with global reach, or is it a rinky-dink security installer that gleans a few customers by playing a petty game of Brand ID fraud?

http://biz.yahoo.com/bw/070201/20070201006350.html?.v=1

Stratis Authority is part of a $1 billion global private equity operating firm specializing in identifying and investing in businesses that offer best-in-class products, services and solutions. Stratis Authority and now MDI are part of the firm’s integrated partner network comprised of over 70 portfolio businesses in multiple vertical markets including Insurance, Construction, Real Estate Development, Software Development, HR Services, Global Consulting, Electronic Communications, Information Technology and Security.

Will MDI confirm the accuracy of this claim, or not?  If its true, it can only be Mirabilis they’re talking about…where else would the HR, consulting, construction, IT and Security claims come from ?

All this fuss about Stratis, Here is More MDII !

MDII just published its proxy statement and there were some eye-poppers in it.

http://www.sec.gov/Archives/edgar/data/318259/000095013407008806/d45780def14a.htm

MDII’s outstanding share count has gone up 5 million to over 29 million — due to its new, largest shareholder Stratis Authority, which is disclosed to own 5.3 million shares.  (the ones they paid less than 50c for in February.)

The second largest shareholder is Victoria & Eagle Strategic fund.  We learn in the footnote that Victoria & Eagles an offshore fund managed by Fabio Conti and Paolo Marmont.

Conti and Marmont seem to have a few legal problems of their own.

Three other people were arrested together with Fiorani: BPI’s former chief financial officer, Gianfranco Boni; Silvano Spinelli, an ex-BPI executive and Fiorani’s one-time right-hand man; and Fabio Massimo Conti, an Italo-Swiss BPI consultant and manager of an offshore investment fund.

An arrest warrant was also issued for Swiss national Paolo Marmont, the joint manager of the fund. Marmont’s whereabouts are not currently known. Former Italian president Francesco Cossiga demanded to know if there was any truth to reports that investigating prosecutors had also asked for Fazio’s arrest but that their request was turned down by the courts.

http://www.italymag.co.uk/2005/news-from-italy/feature-articles/fazio-under-renewed-pressure-to-resign-after-fiorani-arrest/

So the largest shareholder is a shell company of dubious value and disturbing connections, and the second largest holder is a Cayman Island shell run by some gentlemen who are  “accused of accumulating “massive personal fortunes” through insider trading, market rigging and mounting irregular takeover operations and by skimming off profits -”

Conclusion

We’re all accustomed to the wheels of justice turning pretty slowly.  But business people know there’s one exception:  failure to deposit payroll withholding taxes.  Withheld payroll taxes are legally trust funds held by employers on behalf of the Federal Government.  Little in the business world brings more swift and harsh action from the IRS than failure to file them on a timely basis.  Legal responsibility for misuse of Federal Trust funds pierces right through the corporate veil and falls squarely on the individuals involved.¼br /> A batch of recent civil suits, filed by PEO’s acquired by Mirabilis, illustrates the ticking time bomb in Amodeo’s house of cards.  Citron expects its lifespan to be brief.  Meanwhile, MDII’s savior is a just a scarecrow on a stick – It is our opinion that Stratis doesn’t have the money to execute on its agreements.  Except for a 500% share price run-up, MDII is just the same company as it was last week, last month, and last year — losing $6m per year on $8m a year in revenues, with a half million of cash, facing delisting.

Cautious investing to all.