Governance: SEC wraps up Uncommon Media Group actions

It might, at first, seem strange that the SEC has asked a court to unravel orders and dismiss its action against those responsible for the Uncommon Media Group affair.

But looking deeper into the story, it's clear that the SEC was on a hiding to nothing by continuing with its expensive action.

On 21 September, the SEC went back to court to ask for order granting the Commission's motion to dismiss its monetary claims against Defendants Uncommon Media Group, Inc., Lawrence Gallo and Frederick Hornick, Jr.

The SEC took the view that there was no point in continuing: "the Order, entered pursuant to Federal Rule of Civil Procedure 41(a), dismisses the Commission's claims for disgorgement, pre-judgment interest and civil penalties against Uncommon Media a defunct corporation, Gallo, who has been ordered to pay restitution and sentenced to prison in related criminal proceedings and Hornick, who is destitute."

But non-financial aspects of the Action remain and orders remain in force: "previously, Uncommon Media, Gallo and Hornick consented to the entry of a judgment permanently enjoining them from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act), and Section 15(a) of the Exchange Act as to Hornick. In addition, Hornick is barred from participating in any penny stock offering and Gallo is barred from serving as an officer or director of a public company."

At the same hearing, the SEC entered a Final Judgment of Permanent Injunction and Other Relief against Defendant Timothy Rafferty. The final judgment enjoins Rafferty from violating Sections 5 and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. In addition to injunctive relief, the final judgment permanently bars Rafferty from participating in the offering of any penny stock. But as in the cases of Gallo, Hornick and the company, it dismisses the Commission's claims for disgorgement, prejudgment interest and civil penalties against him, because he has been ordered to pay restitution and sentenced to prison in a related criminal proceeding. Rafferty consented to entry of the final judgment without admitting or denying any of the allegations in the complaint.

The Commission commenced this action by filing its Complaint on March 23, 2004 against Rafferty and others, alleging that they violated the federal securities laws.

IN 2004, the SEC announced that , it had filed an emergency action to halt an unregistered offering of Uncommon Media Group, Inc. ("UMDA") and its subsidiary, 3rd Dimension ("3D") by its principal, Lawrence Gallo ("Gallo"), and sales agents and promoters Timothy Rafferty ("Rafferty") and Frederick B. Hornick, Jr. ("Hornick"). On that same day, Judge Daniel T.K. Hurley, U.S. District Judge for the Southern District of Florida, issued various emergency orders against the defendants, including temporary restraining orders, asset freezes, and other emergency relief. According to allegations of the SEC's complaint, the defendants have swindled more than 200 investors out of at least $1.4 million. The Complaint further alleges that the fraud has been ongoing since at least August 2002, when UMDA and Gallo were sued by the SEC and indicted by the United States Attorney's Office for the Southern District of Florida for securities fraud.

Uncommon Media Group was an example of the OTC companies that are constantly in the news through a flow of media releases. For example in 2000, it announced a deal with World Wrestling Federation Entertainment to distribute an interactive CD-Rom with the WWF Magazine, followed by another release saying it had been done. In 2002, it was announced that Uncommon was to put music on the disk. In 2003, it announced its purchase of shares in Ground Troup Marketing, a software company, to bring its shareholding up to 75%.

It announced that it had appointed "Equitlink to assist with its business communications and shareholder relations needs." This, too, has been a common feature of pump and dump stocks. Equitilink said at the time " James J. Mahoney, managing director of Equitilink stated, "Having spoken with the management of Uncommon Media Group, we are very excited about the growth potential for the Company. In addition to developing and producing innovative new marketing and research solutions, Uncommon Media Group, Inc., has also entered into strategic alliances with companies that publish magazines that are extremely well suited for the entertainment and advertising industries. We believe that there is an opportunity to significantly increase Uncommon Media's market position and enhance shareholder value. Our program will help the company inform the marketplace and the investment community about its new product offerings and target markets." The media release from which that statement was taken was published from equitilinkpr.com - the site is now an ad farm.

Equitlink, as evidenced by case papers in an action brought against the company and its principals James and Thomas Mahohey by Premier Development and Investment Inc, took payment for its efforts by taking shares in companies in which they were going to make announcements with a further payment in shares after a period of satisfactory service. This, again, is a pattern widely seen in pump and dump schemes.

There is no allegation made here that Premier Development and Investment Inc nor Equitilink were actively involved in any pump and dump scheme.

The SEC alleged, in 2004, that the companies claims were false. Issuing proceedings, "the SEC's Complaint alleged that Gallo, Rafferty, and Hornick raised funds, through UMDA and 3D, by offering promissory notes and common stock. The defendants recruited investors by word of mouth and during seminars held at various locations throughout the country. According to the SEC's Complaint, Gallo told investors that 3D had the technology to meet current demands of the music, movie, and cellular telephone industries. Gallo and Rafferty touted UMDA and 3D as having many valuable contracts with expected revenue in the hundreds of millions of dollars when, according to the SEC's Complaint, UMDA reported a net loss of over $1.4 million in its last quarterly report. The SEC's Complaint alleges that 3D has never generated any revenues whatsoever. The SEC's Complaint also alleges that Hornick made misrepresentations to investors or potential investors."

In 2006, the SEC issued the following statement:

The Securities and Exchange Commission ("SEC") announced that on September 12, 2006 Timothy Rafferty, a defendant in a $1.4 million unregistered offering of Uncommon Media Group, Inc. ("UMDA") that the SEC halted in March 2004, was sentenced to incarceration for a period of 126 months, followed by three years of supervised release, based upon his conviction to charges of conspiracy to commit securities fraud, conspiracy to commit wire fraud and two substantive counts of wire fraud brought by the United States Attorney's Office for the Southern District of Florida ("USAO"). In addition, the Court also ordered Rafferty to forfeit his interest in his primary residence - a $2.2 million home in Douglaston, N.Y.; a BMW sport utility vehicle; and up to $1.4 million in cash. He was also ordered to pay restitution, and pay a $400 special assessment fee.

Rafferty's sentence was based on criminal charges arising primarily from the same misconduct that led to the SEC's action. According to a Second Superceding Indictment filed by the USAO, from approximately March 2003 to around February 2004, Rafferty, acting as a consultant to UMDA, participated in promoting and selling its stock to potential investors. According to the Second Superceding Indictment, Rafferty solicited investors to invest in UMDA through the use of material misrepresentations and omissions of material facts, some of which are described below.

• Rafferty falsely told investors that if they made loans to UMDA or purchased UMDA stock, they would receive free-trading shares of UMDA stock, when in truth and in fact, investors received only restricted shares, if they received shares at all.
• Rafferty falsely told investors who made loans to UMDA that they would receive their funds back within one year and, in addition, would receive interest at an annual rate of 10% when, in truth and in fact, such repayment of funds and payment of interest were impossible because investor funds were being directed away from UMDA by Rafferty and other conspirators to pay for things unrelated to the operations of the company and because UMDA's only real source of revenue was the funds invested in the company by newer investors.
• Rafferty falsely represented that a prominent businessman had agreed to buy out UMDA at $3 per share to $5 per share, but that Lawrence W. Gallo, president and chief executive officer of UMDA, had cancelled the deal because UMDA was worth far more than that when, in truth and in fact, no such agreement ever existed.

According to the Second Superceding Indictment, Rafferty conspired to commit wire fraud and committed wire fraud by causing investors to wire transfer monies in furtherance of the fraudulent scheme described above.

The SEC filed its emergency action against Rafferty, Gallo, Frederick Hornick, Jr., and UMDA on March 23, 2004. On that same day, Judge Daniel T.K. Hurley, U.S. District Judge for the Southern District of Florida, issued various emergency orders against the defendants, including temporary restraining orders, asset freezes, and other emergency relief. The SEC's complaint charged UMDA, Gallo, Rafferty, and Hornick with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Hornick with violating Section 15(a)(1) of the Exchange Act. Those sections and rules prohibit certain transactions in securities not registered with the Commission, prohibit fraud in the offer and sale, and in connection with the purchase and sale, of securities, and prohibit sales of securities by unlicensed brokers or dealers.

Gallo and Hornick consented to a Judgment of Permanent Injunction and Other Relief ("Judgments") in the SEC's case, without admitting or denying the allegations of the SEC's complaint. The Judgments were entered on July 2, 2004, and June 8, 2004, respectively.

On July 13, 2004, the USAO filed an indictment charging Gallo with securities fraud, wire fraud, and mail fraud, and charging Gallo and Rafferty with conspiracy to commit securities fraud. On July 26, 2004, Gallo pled guilty to one count of conspiracy to commit mail and wire fraud.

UMDA consented to a Judgment of Permanent Injunction and Other Relief ("Judgment") in the SEC's case, without admitting or denying the allegations of the SEC's complaint. The Judgment, which was entered on July 7, 2005, enjoins the company from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Additionally, the Judgment provides for disgorgement and the imposition of a civil penalty in amounts to be determined by the Court upon the SEC's motion.