Dempsey's ex-wife made the claim that he threw the fight after they were divorced, and when she was trying to shake him down in the midst of his draft-dodging problems with the government. Abe Attell was a great fighter, and an equally corrupt individual according to all I've read about him. Rocky, these aren't exactly unimpeachable sources for the claim.
On the otherhand, Flynn could punch a bit - 34 of his 43 wins came by KO. I think if Dempsey was truly "broke [and] living a street life at the time," it is not unlikely he went into the Flynn fight out of shape an got cold-cocked by the proverbial "lucky punch." I agree it was unlikely for Dempsey to lose to Jim Flynn, but it is within the realm of possibility. That's what makes boxing a great sport.