NorVergence Bankruptcy Trustee Sues 26 Banks/Officers
By MARTHA McKAY
Dozens of banks and leasing companies doing business with NorVergence knew there was a massive scam afoot at the Newark-based telecommunications company long before it went belly up in 2004, according to a lawsuit brought by the bankruptcy trustee representing NorVergence.
The lawsuit accuses eight insiders, including NorVergence mastermind Thomas N. Salzano, and at least 26 banks and leasing companies of ignoring red flags that should have signaled big problems at the company in the months leading up to its spectacular flameout.
Dubbing the elaborate business scam the "Salzano Scheme," Warren Martin, a Morristown attorney representing the bankruptcy trustee, argues that the companies, including Citigroup and Wells Fargo, should have cut ties with NorVergence, but instead helped push it deeper into debt.
The suit, filed late Friday in U.S. Bankruptcy Court in Newark, seeks to recover more than $144 million.
The leasing companies, "by enabling the Salzano Scheme to continue, enabled [Thomas] Salzano ... and key employees to take millions of dollars out of the business to support lavish lifestyles," the suit says.
Creditors assert the company owes more than $550 million.
"We hope to recover substantial funds for the benefit of all the creditors, particularly for the unpaid employee wages and [NorVergence customers]," Martin said Monday.
NorVergence's abrupt bankruptcy threw 1,300 people out of work and left thousands of small-business customers, who fell for NorVergence's hard sell tactics and promises of lower telecommunications bills, without any phone and Internet service.
Legal battles raged when customers tried to get out of five-year equipment leases for a virtually worthless "Matrix" box that NorVergence promised would deliver those discounted communications services. NorVergence's main source of cash came from selling most of its customer leases to banks and leasing companies for hundreds of millions of dollars.
Those banks and leasing companies should have been alerted to problems at NorVergence in October 2003, the lawsuit argues, when customers failed to make their first lease payments. The number of first-payment defaults, as they are known, "increased dramatically" through early 2004, the lawsuit says.
"NorVergence was unable to install the [Matrix] boxes quickly enough, or get the customer's [phone and Internet] service activated in time to avoid [payment defaults]," the suit says.
Under the agreements between NorVergence and the leasing companies, which include CIT Group, the Citigroup, and Wells Fargo, NorVergence was buying back those defaulted leases quickly, which should have been a signal to the companies that NorVergence was having trouble, according to Martin.
Martin argues that the companies received $6.6 million from NorVergence to purchase those defaulted loans -- and that cash should be returned to the company to pay off creditors.
"During this period of time, and due to the large number of first payment defaults, the leasing companies could have, pursuant to their contracts, refused to fund future leases," the lawsuit reads.
Instead, the companies kept buying new leases as NorVergence signed up new customers, according to the suit.
The lawsuit calls for the leasing companies, along with eight executive insiders including Haworth resident Robert Fine and Teaneck resident Robert Wizeman, both former NorVergence vice presidents, to pay back more than $138 million, which is the amount of NorVergence debt in March, 2004. The lawsuit also seeks more than $12,000 from Fine and $37,000 from Wizeman, payments made by NorVergence on top of their salaries.
The lawsuit also accuses Salzano of taking more than $2.5 million of NorVergence funds for everything from BMW payments to apartments to jewelry to visits to "gentlemen's clubs."
The suit also says that William Jean Charles of Woodbridge, a NorVergence director and vice president, received more than $273,000 on top of his salary which should be returned.
Neither Fine nor Wizeman could be reached for comment. Charles' phone number was not listed.
Salzano's attorney Eric Rubin, was not available for comment.
Martin said the leasing companies in some cases used sales scripts -- essentially language sanctioned by NorVergence -- when contacting customers to ascertain whether their Matrix box had arrived and to assure customers that their service would soon be turned on.
As it turned out, service in many cases was never turned on, and the Matrix box, a simple router, did nothing to lower customers' phone and Internet charges, despite what NorVergence sales representatives promised.
As for what more the leasing companies should have done to avoid the "Salzano Scheme," Martin said bluntly, "I think they should have looked at the damn Matrix box."
Wells Fargo spokesman Steve Carlson said his company could not comment on pending litigation.
"Just as our valued customers suffered financial loss and interruption to their business, we, too, were one of more than 11,000 companies large and small nationwide that was negatively impacted by this unfortunate situation. None of the various federal or state investigations conducted following the NorVergence bankruptcy filing found any wrongdoing by Wells Fargo Financial Leasing," Carslon said in a statement.
The lawsuit lays out in detail certain NorVergence practices as well as Salzano's personal spending (the suit names Salzano's brother Peter J. Salzano who was CEO, but calls him a "front man.")
It describes NorVergence's business as half Ponzi scheme and half "bust out," a "complex and ingenious combination [that] generated cash [not profit] through the exponential expansion of its customer base ... by selling its products, telecommunications and Internet services, to customers at a great loss."
The bankruptcy trustee also sought to recover other money last week, filing lawsuits against at least 36 companies such as vendors that did business with NorVergence prior to its bankruptcy, and at least 34 shareholders of the privately held company.
The shareholders paid from $6,250 to $50,000 for shares of NorVergence and received payments that in most cases fell short of their original investments. The bankruptcy trustee argues that those payments should be returned to the company.
Efforts to reach several shareholders were not successful.