NorVergence bankruptcy leads to charges of scam 

( For the first time, how salesmen sold their product, and why the scheme finally caught up to the Salzano's—a second time.)

    By MARTHA McKAY STAFF WRITER
The Record, Bergen County, NJ

At the center of a massive New Jersey bankruptcy that dealt a blow to 11,000 small businesses in more than 20 states is a small box called "The Matrix."

Newark-based NorVergence, a privately held phone-service reseller, boasted that the box was packed with enough of the very latest telecommunications technology to deliver cheap, unlimited local and long-distance phone, cell service, and high-speed Internet access. In fact, the box was a gimmick. In some cases, it had no practical use at all.

"It's an unbelievable scam," said Meredith Wood, who runs an industrial services business in West Milford.

"I wish I'd thought of it," she said with a rueful laugh. "I'd be calling you from my private island."

Wood bought unlimited long-distance and cell phone service from NorVergence last year and signed a lease for a Matrix box that NorVergence never even plugged in. Now, Wood is stuck owing a five-year, $45,000 equipment lease to U.S. Bancorp for her Matrix, a piece of gear worth about $600.

The story of how Wood and thousands of other small-business owners were victimized began to unfold last month, when NorVergence flamed out in a Chapter 7 liquidation in U.S. Bankruptcy Court in Newark. The company, which once boasted $200 million in annual revenues, left 1,300 employees without jobs, large phone companies such as Qwest, Sprint, and T-Mobile owed at least $30 million, and lawyers wondering where all the money went.

Qwest has received the court's permission to shut off service to NorVergence's former customers, leaving Wood and the thousands of other business owners potentially without phone service but still owing hundreds of millions in payments to banks and finance companies who paid NorVergence millions for the leases.

Christopher Menkin, editor of Leasing News, believes the NorVergence case is "one of the biggest leasing scandals in the last 25 years."

Corporate culture Drawn in by NorVergence's deeply discounted phone service and slick, reassuring marketing materials, many small-business owners probably didn't think to delve into the company's background.

If they had, they might have turned up court records showing the man who ran NorVergence, Thomas N. Salzano, had piloted another telecommunications company that ended in bankruptcy, where creditors accused him of illegally funneling $2.7 million of company funds into a Swiss bank after filing for Chapter 11 protection.

By all accounts, Salzano, who was NorVergence's chief managing officer and was listed as a director in a Securities and Exchange Commission filing, ran the company despite the CEO title of his brother, Peter J. Salzano. He's described by those who know him as a high-energy executive with a quirky style who rarely wore ties, instead favoring white leisure suits and colorful printed shirts.

He's got "a lot of marketing savvy" and "a lot of ego," those people said -an arrogant charmer with a creative business mind.

Neither of the Salzano brothers responded to requests for an interview.

By mid-2003, just two years after it was founded, NorVergence was
buying millions of dollars worth of phone and Internet service from some of the nation's largest carriers, including Qwest, Sprint, and T-Mobile, and reselling at a deep discount to thousands of small businesses.
The company hired hundreds, packing so many workers onto two floors
at 550 Broad St. in Newark that the building's air conditioning was
overwhelmed and NorVergence had to rent more floors.

Salespeople, many of whom had previously worked in the telecommunications industry, were attracted by promises of hefty commissions. The sales teams followed a pitch based on a series of scripts hammered home during a two-week sales tryout in Newark.

Kirk Dennis, a top salesman in the Chicago area, recalls a boot camp-like atmosphere where memorizing the script made the difference between getting a job and getting kicked out.

The NorVergence trainers made you sweat with their intimidating behavior, said Dennis, describing how they would "catch you in a hallway and say,' Give me your script. 'Y" Anyone who floundered was escorted out.

Of the 90 people who began with Dennis, only 30 were offered a job. Described by customers as highly polished and aggressive, NorVergence salespeople fanned out across the country as their employer rapidly opened well-appointed offices in 36 cities.

The pitch, the catch Armed with their sales pitch, and backed up by a flashy Web site, the company went after small-business owners with good credit records, most of whom did not have a telecommunications expert on staff. The salespeople, known as screening managers, used dense, acronym-rich telecommunications jargon in their descriptions of the cheap, unlimited phone services that the "MATRIX unlimited calling solution" would deliver.

According to a sales script obtained by The Record, a screening manager would tell a prospective customer "because we're swamped with so many new requests, my job is to screen for only qualified applicants down to just the few allowed for each area."

"They let you know if they were going to accept you as a customer - that was their marketing gimmick," said Carol Marubio, owner of an Illinois roofing company that signed up.

 But by far the bigger gimmick was the Matrix box. To sell phone service to their small-business customers, NorVergence, a reseller, bought it wholesale from large carriers such as Qwest and Sprint.

But when the sales team pitched the company's "solution" to customers, the Matrix box was key.

What many eager customers apparently missed was the fact that the "unlimited" phone and Internet service NorVergence sold them had no direct relation to the box, which performed a limited function in some customers' cases (it allocated bandwidth over a T1 line), and no function in others.

Many apparently believed that the box could be used by other phone providers.

Most customers didn't think NorVergence would go out of business.

One former salesman said they were told that if a customer asked what would happen if the company ran into trouble, to "just say nothing" and dismiss the possibility.

And some customers interviewed had no idea that NorVergence would sell their Matrix lease - for cash - to banks and finance companies, in much the same way a bank might sell a mortgage to a third party.

Those sales funneled millions to NorVergence, and locked its customers into long-term relationships with a bank.

"In my opinion, [NorVergence's] whole setup was designed to sell equipment leases," said Dan Baldwin, spokesman for TelecomAgent, a non-profit organization that represents sales agents in the telecommunications business, who has been looking into NorVergence's business since early last year.

As for the box, David Silverman, a NorVergence salesman based at the company's Broad Street headquarters, told the U.S. Bankruptcy Court at a recent hearing that the Matrix box was useless.

"These boxes serve no purpose; they're worthless," he told the court. Scores of local companies and organizations - even the New Jersey Republican State Committee offices in Trenton - signed up for NorVergence service, lured by those promises of deep discounts. It was hard to turn down.

The company installed customers at the rate of 350 a week - averaging about $6 million in weekly sales - practically up to the bankruptcy filing, said Oscar Delatorre, a former NorVergence employee who oversaw installations.

That's an estimated $132 million in sales for the first five months of 2004 alone.

According to a former NorVergence vice president who supplied sales figures to The Record, new customers signed contracts for $409 million worth of phone systems from January through June 4. Of that, an estimated 40 percent actually were installed, bringing the total sales closer to about $164 million.

Last gasp The whole company was focused on marketing and sales, former employees said.

As its debts rose, NorVergence ratcheted up its sales effort, and other parts of the business began to deteriorate, they said. "Customer service and installation was an afterthought," said Jeff Carlsen, vice president of facilities engineering.

Around January, the company told employees it was looking for investors, but that effort apparently failed.

On the seven floors at 550 and 570 Broad St., the signs of disorganization were disturbing.

"There were tables stacked with piles of folders; there was no particular order to customer files," said Carlsen. "It was unbelievably unorganized."

Technical problems arose with a new 800 service the company tried to introduce. It had to pay its mounting bills to Qwest and others - nearing $2 million a week toward the end - to cover service for its existing customer base. So it kept adding more and more new customers, selling their leases to banks, and collecting the cash.

It pushed its sales staff hard. By some estimates, NorVergence signed up as many as 4,000 customers over the last six months, without connecting their phone service.

After it fell behind in its payments to Qwest, the Colorado-based carrier shut off service for two days in mid-June. Several days later, NorVergence bounced hundreds of payroll checks, but asked its employees to keep working.

As creditors closed in, the normally feisty Tom Salzano appeared defeated, according to one person who met with him then.

On June 30, the company was forced into an involuntary Chapter 11 filing by three banks.

It laid off about 1,000 people that day, owing hundreds back pay and commissions. As the Salzanos moved to get the word out, the news spread to other floors and a few angry, now ex-employees tried to leave the building with office equipment, former employees said.

Two days later, in bankruptcy court again after a failed attempt by some banks to inject cash to prop up the operation, NorVergence converted to a Chapter 7, closing for good and liquidating assets.

The aftermath Qwest received permission from the judge to shut off service to NorVergence customers, setting off a mad scramble among customers to find new phone service.

A trustee took possession of NorVergence offices and began the process of selling any assets. (It remains to be seen if there will be anything left. So far, Qwest is the largest unsecured creditor, with at least $15 million owed, followed by Sprint with at least $10 million. But before they get anything, secured creditors will get paid, along with former employees who file claims.)

About two weeks ago, frustrated customers began to receive letters from banks and finance companies holding the Matrix leases that they'd better keep paying.  Dozens of NorVergence customers have formed a legal co-op, hiring a lawyer to fight the banks and get them out of their leases.

There is talk of a class-action suit. Meanwhile, it's still not clear whether the banks and finance companies that bought the Matrix leases understood what they were getting. One source said it appears that some of the finance companies were not aware, for example, that the Matrix box could not be used by another phone provider in the event NorVergence shut down.

One source familiar with the group of 35 banks and finance companies said they purchased at least $220 million worth of NorVergence customers' leases. Some banks are trying to line up new phone-service providers for NorVergence customers.

 A spokeswoman for Adtran, which made the boxes and sold them to NorVergence, said her company was working with the banks to try to fix the problem.

"Transferring telecommunications services from NorVergence to a different carrier likely requires modification or replacement of equipment [the Matrix box] owned primarily by equipment leasing companies," she said.

A spokeswoman for Popular Leasing, a finance company owned by Banco Popular, said the company had no comment on the NorVergence situation. So did Wells Fargo. And the CIT Group.

Also unclear is the role Robert J. Fine played in the NorVergence debacle. Fine was NorVergence's director of bank relations, who apparently made the connections between the banks and NorVergence. He recently resigned as president of the trade group Eastern Association of Equipment Lessors (EAEL), according to Leasing News.

Before joining NorVergence, Fine held numerous positions in the leasing industry. The EAEL did not return repeated phone calls, and Fine could not be reached for comment. 

On the last day of NorVergence's existence last month, Tom Salzano did not appear in court but his brother Peter, the CEO, did. His face beaded with perspiration, Salzano left the courtroom to jeers by former employees who came to the hearing. He kept his head down and walked away.