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Due Diligence on Steroids by Shawn Halladay (This blog which appeared last week on www.leasingnotes.com is being passed around on the anti-leasing company blogs and web sites, and seems to aroused NorVergence lessees and others in the same vein to no end, stating Mr. Halladay speaks for the entire equipment leasing industry. (I think Mr. Halladay would be flattered to hear that, and thought readers might like to determine if the accusation is valid. editor)
As reported in Leasing News, the NorVergence bankruptcy trustee is bringing suit against Thomas Salzano and seven other NorVergence insiders. The lawsuit, filed last Friday in US Bankruptcy Court in Newark, seeks to recover more than $144 million from various parties. The NorVergence trustee, in other legal actions, also is trying to recover money from 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 trustee maintains that these shareholders received payments for their investment in the company, which should be returned. The interesting aspect of the litigation, though, is that the trustee also has included roughly 26 banks and leasing companies in the suit as parties to the fraud. According to the suit, those financial institutions that did business with NorVergence knew, long before the company's demise, that a scam was being perpetrated. The suit contends that the leasing companies ignored red flags, such as high numbers of first-payment defaults and delays in Matrix box installations, and continued to do business with NorVergence, rather than bailing out, thereby contributing to NorVergence collapse. I fully understand the trustee's motivation in attempting to recover, from whatever source, as much money as he can for the bankruptcy estate, having been involved as in expert in similar cases. The ramifications of the suit for the leasing industry, however, could be staggering. I see two basic issues here. The first, and easiest to address, is the inference that very large and reputable leasing companies such as CIT, Citigroup, and Wells Fargo Financial Leasing sat in their offices rubbing their hands in glee as they willingly broke the law over what, to them, were relatively insignificant profit opportunities. I find the notion that companies such as these, in large numbers, knowingly defrauded their customers as being farcical. If they knew, as the suit contends, that NorVergence was a Ponzi scheme, then they also would have known that doing these deals also would contribute to their own losses. I don't think so. You can argue all you want that there could have been more analysis of the equipment, but this suit is pushing the issue a bit far. Perhaps the most disconcerting aspect of this lawsuit are the implications going forward if the trustee is successful. Essentially, the NorVergence trustee is trying to place the responsibility and attendant liability to detect potential frauds against their customers on the shoulders of the leasing companies. Under the NorVergence trustee's view of the world, lessors would be held to a fraud-detection standard equal to, if not higher, than that of an auditor under Statement of Auditing Standard 99. This concept is patently absurd both from a rational and cost perspective. Who will want to be a lessor, or at what cost, if this suit is successful? Long live litigation!! Shawn D. Halladay http://www.thealtagroup.com/bios-halladay.php
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