NorVergence probe examines insider transfers

BY GREG SAITZ

New Jersey Star-Ledger Staff

At the end of June, Newark telecommunications reseller NorVergence owed $15 million to one supplier and millions more to others.

The company was about to be dragged into bankruptcy court by angry creditors who weren't getting paid.

But in the five days before the June 30 court action, NorVergence managed to wire more than $160,000 to two related companies, according to court papers.

One, Network Digital Office Systems, is run by NorVergence Chief Executive Peter Salzano. The other, Data Solutions, provided the consulting services of Salzano's brother, Thomas, to NorVergence.

The payments were disclosed in financial statements filed last week in the bankruptcy case.

"We are examining the nature of those transactions to insiders," said attorney Michael Holt, who represents the bankruptcy trustee, Charles Forman. "We'll see where it goes from there."

An attorney for Peter Salzano has denied any wrongdoing and played down the significance of the payments, which were made because Network Digital leased copiers to NorVergence.

NorVergence's collapse left about 11,000 small businesses around the country -- some 1,000 of them in New Jersey -- scrambling for new phone and Internet service providers. Many of those companies, which signed equipment leases with NorVergence, also find themselves in litigation with financial services firms that bought the leases as investments and are trying to collect on them.

The Federal Trade Commission has accused NorVergence of defrauding consumers, and attorneys general in several states, including New Jersey, are investigating.

At the same time, hundreds of former NorVergence customers are pursing legal action against various leasing companies, seeking to be relieved of millions of dollars in continued lease payments on useless equipment.

As part of the continuing bankruptcy case, which was converted to Chapter 7 liquidation in July, the trustee culled through NorVergence's records to provide a statement of the company's financial affairs. The process included an accounting of NorVergence's assets, listed at $53.6 million, and debts, which amounted to $87.3 million.

One document listed payments to "possible insiders" between July 2003 and June. During that period, NorVergence sent $1,000,844 to Network Digital Office Systems, a Fairfield-based leasing company Peter Salzano operated prior to starting NorVergence with his brother in 2001. He continues to run Network Digital and is listed as president of the company in a D&B report, which also said the firm has 19 employees.

On June 28, just two days before creditors forced NorVergence into bankruptcy, the company made four wire payments totaling $103,776 to Network Digital, court records show. Every payment prior to that date had been made via check.

About the same time, another $61,308 was wired to Data Solutions, with payments made June 25, June 29 and June 30. Peter Salzano testified during a court proceeding earlier this month that NorVergence contracted with Data Solutions for the consulting services of his brother, Thomas. Thomas Salzano could not be reached for comment.

"It would bother me. It would upset me to find that out, especially when we're paying for a lease on equipment we can't use anymore," Mary Carroll, client services manager of the Morristown marketing firm Fiore Associates, said when told of the payments.

Fiore Associates used NorVergence for about a year and continues to make payments on its five-year lease for NorVergence equipment.

The government contends NorVergence fraudulently marketed its high-tech "Matrix box" as a way for customers to enjoy discounted services, when in reality the component was a standard phone router.

Holt, the trustee's attorney, said the Salzano brothers have appeared for questioning by the trustee, but both refused to answer certain questions about NorVergence's operations at the urging of their counsel.

Michael Sirota, an attorney who represents Peter Salzano, said the financial statements filed by the trustee in the bankruptcy case were prepared without the input of NorVergence executives. He also said at the time the wire transfers were made to the two other companies, no one at NorVergence knew creditors were about to pull them into an involuntary bankruptcy.

"So transactions close to the involuntary petition, in my mind, are meaningless," Sirota said. "You have to look at the information in total to see these were transfers and transactions in ordinary course. Just because there's arm's-length transactions doesn't mean something is wrong."

Louisiana State University Professor Tim Louwers, who specializes in forensic accounting, said the related-party transactions, the timing of the transactions and the method used for the payments -- in this case, wire transfers -- all raise red flags and should be looked into.

Greg Saitz can be reached at gsaitz@starledger.com or (973)392-7946.