NorVergence---FTC Shoe to Follow by Christopher Menkin
Leasing News was not only able to print the latest NorVergence story in full, but also had it early, as writer Martha McKay sent it to us at 7:14am in the morning. We have been helpful to each other since the beginning, when NorVergence employees were not getting paid. We appreciate her thinking of our readers. If you missed the “extra, “because you are not on our mailing list, here it is: http://www.leasingnews.org/archives/July%202006/07-18-06-extra.htm The other shoe will drop soon as the Federal Trade Commission has been active behind the scenes, working on several of the Trustee claims in the bankruptcy court. The FTC also holds two major judgments from the court itself. Here are some highlights of the trustee's recent filing: Date filed: 06/30/2004 (original bankruptcy) (Ironically, she is also the judge on the Allserve case) Trustee Over 150 “lead” attorneys, not counting their staff: http://www.leasingnews.org/Pages/Norv_Attorney_list.doc In the Friday, July 14, 2006 53 page filing by Warren J. Martin, Jr., Special Litigation Counsel to Charles M. Forman, Chapter 78 Trustee of the Estate of NorVergence, Inc., highlights: Some of the individuals named: Thomas N. Salzano ; Data Solutions Ltd. ; Peter Joseph Salzano ; Alexander L Wolf ; Robert Fine ; Robert Wizeman ; William Jean Charles ; Terry Schemer ; Arthur Scuttaro and others with their current residential addresses. The majority of leasing companies named (32): ABB Business Finance Inc
In addition there are over a 100, perhaps even higher, of specific complaints pertaining primarily to transfers or payments to “defendant” (most “90 days prior to petition date”) that the trustee is claiming: Dolphin Capital $59,281 Included in what appear to be the same transfer claim: Spring $4,781,722 A group of other “creditors,” in the $20-$50,000 range, such as Dell, $31,817 except for Staples $97,940.19 and Moritt, Hock, Hanroof & Horowitz, LLP $56,665 There is a group which appears against NorVergence lessees who made payments to banks and leasing companies and refers to “Two-Year Fraudulent Transfers” involving such action as “...contributed $25,0000 to NorVergence in Agreement whereby Defendant...contributed $25,000 in consideration of 100,000 shares of common stock and a promissory note for the benefit of the defendant. These seem to be “investors” who received a return for their stock investment with a note that called for monthly payments, that the Trustee now claims should be “returned.” Here is a short sample: Glenn Toussaint $21,862 It appears they will lose their original investment (stock), as well as payments received on the original note, too. (More on this in another issue: editor.) Here is the “introduction” to the 53 page filing with 58 pages of Exhibits: INTRODUCTION 1. When a "business" is designed, not to earn a profit, but simply to generate cash through the addition of larger and larger numbers of new customers, the "business" will constitute a Ponzi scheme 1 Charles Ponzi established The Security Exchange Company in Boston on December 26, 1919, promising investors 50% interest in 45 days. His alleged business was international postage stamps, which would be converted into U.S. dollars at great profit. Investors lined up and Ponzi made good on his promise, paying 50% interest to investors in 45 days until his house of cards collapsed in August of 1920. It seems that there was no underlying business and that Ponzi was simply paying interest to old investors with new investors' money. As long as the "business" grew exponentially, it worked. But without a constant supply of new customers, it failed. All told, 40,000 people 1044033 5 2. When a "business" is designed to sell goods or services to customers at a loss (because there is no ultimate intention of paying the vendors) the "business" will constitute a "Bust-Out," too. 3. NorVergence, Inc. ("NorVergence" or "Debtor") was a complex and ingenious combination of a Ponzi and a "Bust-Out": it generated cash (not profit) through the exponential expansion of its customer base. But it accomplished that exponential growth by selling its product, telecommunications and internet services, to customers at a great loss. The Insiders, defined below, and particularly Thomas N. Salzano, lived lavishly off the cash flow, until the source of new customers dried up. This scheme shall hereinafter be referred to as the "Salzano Scheme." SUMMARY 4. NorVergence was incorporated in September, 2001, by Peter Salzano ("Peter"), as CEO and major shareholder. The actual mastermind and principal behind NorVergence from the start was Thomas N. Salzano ("Salzano"), Peter's brother. Salzano was never directly employed by NorVergence as anything other than a consultant, although he managed and controlled all of NorVergence's affairs from the start. 5. Salzano had a history of running telecommunication companies with large call center operations into bankruptcy3, as well as a record of regulatory problems with the Federal Communications Commission ("FCC") and various state agencies. 6. As a result, Salzano chose to keep his name out of the public eye in connection with NorVergence's start up, and chose his brother, Peter to serve as NorVergence's front man. entrusted an estimated fifteen million dollars with Ponzi. He and his staff lived lavishly. In truth, there was no business, no profit motive, and no profits (only cash). Ponzi went to jail for fraud. 2 In a "Bust-Out," a business places large orders with vendors on credit, never intending to repay the vendors. The products are sold to customers at cheaper than wholesale (which causes the product to move very quickly). The operator then quickly shuts things down and leaves with the money, without paying the suppliers, of course. See, e.g., United States v. Crocket, 534 F.2d 589, 592 (5th Cir. 1972) . 3 National Telecommunications, Co., Inc. and Minimum Rate Pricing filed for bankruptcy protection on February 26, 1999. On November 3, 1999, Discount Call Rating, Inc. also filed for bankruptcy protection. 1044033 6 7. From September, 2001, until late in 2002, Salzano carefully planned the roll out of the Salzano Scheme. NorVergence would be both the victim and the vehicle through which the Salzano Scheme was perpetrated. NorVergence began operations late in 2002. For a few short months of operations in 2002, NorVergence had gross revenues and lease sales receipts of $19.5 million. 8. In an initial filing with Dunn & Bradstreet in 2001, before operations began, Peter had estimated revenues of $90 million in the first year of operations. In 2003, the first full year of operations, NorVergence had gross revenues and lease sales receipts of $142 million. In the first 6 months of 2004, prior to the June 30, 2004 involuntary petition date filing, it had lease receipts and gross revenues approaching $150 million and anticipated annualized gross revenues and lease sales receipts of $350 million. 9. The problem, as will be shown below, is that very few of these receipts represented true earnings, as opposed to money simply churned from the acquisition of new customers. 10. The Salzano Scheme caused hundreds of millions of dollars to be funneled into.the business, only to be expended on landing new customers, and the lavish lifestyle of Salzano, all to the detriment of NorVergence and NorVergence's customers and creditors. 11. Alexander L. Wolf, Robert Fine, Robert Wizeman, William Jean Charles, Terry Skemer and Arthur Scuttaro (the "Insiders") were all officers and/or directors and/or employees with significant management responsibilities who understood all or a significant part of the Salzano Scheme and nonetheless, breached their fiduciary duties to NorVergence by actively participating in it and by permitting it to continue for almost two years, unabated. 12. In addition to their regular payroll and company credit cards, the Insiders received at least $854,000.00 in additional payments from NorVergence. 1044033 7 13. The cash passing through NorVergence (there were never profits – only cash) supported Salzano's lavish lifestyle, as well as the lifestyles of the Insiders. In this Complaint the Trustee seeks to recover some $2.7 million in known transfers made to Salzano. 14. Finally, the Leasing Companies named in this Complaint were the recipients of fraudulent conveyances and other transfers which, among other things, served to perpetuate the Salzano Scheme. Certain payments made to the Leasing Companies are avoidable as actual intent fraudulent conveyances under 11 U.S.C. § 548 as well as § 544, utilizing state law. The Leasing Companies also knew or should have known about the fraud, and as such, are also liable for aiding and abetting the fraud, aiding and abetting a breach of fiduciary duty, and for the deepening of NorVergence's insolvency. Some of the Leasing Companies may have also improved their position by way of setoff, in the 90 days prior to the bankruptcy, which amounts are recoverable under 11 U.S.C. § 553(b). Here is the full 53 page filing: Exhibit “D” in the 58 pages of exhibits attached was the S.O.S. case reported here in Leasing News concerning IFC Credit Corporation, one of the key exhibits in this presentation. It is noted the findings of the case IFC Credit “...knew that NorVergence customers were not receiving service and therefore were not receiving promised savings” and “ IFC participated in deceiving customers through its confirmation script...IFC grossly over-charged for the Matrix Box...IFC did not act in good faith in connection with the Lease. IFC ratified the conduct of NorVergence (pages 28) Here is the Exhibits attached to the original filing: IFC Credit:
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