A somewhat long article, but I believe of interest to Telecom Digest
participants, given prior posts on the subject.
Promised Savings, They Rented the Boxes And Now They're Really Paying
for It; NorVergence Went Bankrupt; Customers Still Owe
By Dina ElBoghdady
Washington Post Staff Writer
The smooth-talking salesman with his glossy brochure promised Kelly
Vogan huge savings on his firm's telephone, cell phone and Internet
bills if only he'd rent a "revolutionary" piece of high-tech gadgetry
called the Matrix box.
With the lure of 30 to 60 percent savings, Vogan signed up with New
Jersey-based NorVergence Inc. and even insured the small red box as
required. He paid $435 a month to rent the box and an additional $13
for services, including unlimited long distance.
Last summer NorVergence filed for bankruptcy, and customers like
Vogan, who owns a home remodeling firm in Silver Spring, found that
their troubles went far beyond the loss of phone service. They
discovered they were obligated to keep paying rent on the boxes to
third parties, which had bought the rental contracts from NorVergence.
"The more I think about it, I'm not sure I even understand how it all
worked," Vogan said. "But it worked just fine for a while."
Vogan's company and 11,000 other small businesses nationwide are
entangled in an alleged scam that has attracted attention from the
Federal Trade Commission and attorneys general in about two dozen
states.
In the Washington area, at least $6.6 million in rental fees owed by
350 businesses in the District and Maryland is at stake. Numbers for
affected Virginia firms are not available.
The fallout from NorVergence's collapse illustrates how vulnerable
small-business owners are to those who prey on their lack of
technology know-how, said Jonathan Zuck, president of the Association
for Competitive Technology, which represents small
information-technology businesses.
"Small-business owners are particularly susceptible to fraud ...
because they lack in-house expertise" and sometimes end up overpaying
for services, Zuck said.
The FTC, for example, charges that the box NorVergence persuaded its
customers to rent was nothing more than a mix of standard routers that
help connect telephone equipment to long-distance providers' lines.
NorVergence and its former chief executive, Peter J. Salzano, deny any
wrongdoing. NorVergence filed for Chapter 11 protection in June 2004.
The filing was later converted to Chapter 7 liquidation.
The FTC accuses NorVergence of defrauding customers by charging
inflated rents for the boxes -- $400 to $5,700 a month -- and then
selling the rental contracts at a discount to third-party finance
companies for quick cash.
"NorVergence was able to provide a few early customers with
'discounted' services only because it used the proceeds of contracts
from new customers," the FTC said in November when it filed a civil
action against the company in U.S. District Court in New Jersey.
Here is how it worked: NorVergence bought services, such as e-mail and
Internet connections, from well-known firms such as Qwest
Communications International Inc. or Sprint Corp. at wholesale rates.
It would then re-brand, re-price and resell the services under its own
brand name, while making money off the box rentals. In the brochure
presented to Vogan, NorVergence promoted its partnership with Qwest
and Nortel Networks Corp. Both those firms distance themselves from
NorVergence.
"We did not lend our name. That was used without our permission," said
Claire Mylott, a spokeswoman for Qwest. "The reason we don't lend our
name [to any vendor] is because we can't control how our name would be
used."
Bryan Zidar, a spokesman for T-Mobile USA Inc., which provided
handsets to NorVergence, said his firm was as much a victim of
NorVergence's situation as the many small-business customers.
"When NorVergence filed for bankruptcy, we were owed significant
money," Zidar said. "So we asked the judge for the monies owed. We
didn't get it. But we were granted the opportunity to reach out to
wireless customers with T-Mobile handsets and switch them over to
T-Mobile service."
Vogan said he got a similar offer from Sprint and switched over as
soon as he learned of NorVergence's bankruptcy. Had his troubles ended
there, Vogan would have brushed off the episode as a minor
inconvenience.
Instead, the finance company in charge of his rental contract
continued to bill him $435 a month for his Matrix box. That is because
the fine print on NorVergence's rental agreements locked customers
into long-term contracts even if NorVergence failed to deliver
service.
In Vogan's case, that meant he was responsible for an additional
$19,000 to cover the balance of his five-year contract. Reluctantly,
he paid the monthly fee to protect his company's credit. Others who
refused to do so found themselves engaged in legal battles when the
finance companies sued them.
"It was frustrating," Vogan said. "I had about 3 1/2 years worth of
payments left on my contract and I had nothing to show for it but a
useless red box."
But relief is in sight.
Last month, a few of the 40 finance firms that handled NorVergence's
rental agreements agreed to forgive most of the debt owed under a
settlement reached with attorneys general in 18 states.
In Maryland and the District, settlements were reached with CIT
Technology Financing Services Inc. and CIT Group/Equipment Financing
Inc., General Electric Capital Corp., U.S. Bancorp Business Equipment
Finance Group Inc., and Wells Fargo Financial Leasing Inc.
Each firm agreed to forgive about 85 percent of the rental fees. If a
small business has paid more than the 14 or 15 percent due after July
2004, it will receive a refund of the amount it paid over that
percentage.
The deal wipes out $5.7 million in debt for 278 businesses in Maryland
and $924,000 in debt for 39 businesses in the District.
"We believe we have done the best we can do," said Maryland Attorney
General J. Joseph Curran Jr. "We were not able to convince the finance
firms to take the entire loss. They came back and said: 'We are
victims too. Why should we suffer the entire loss?' "
Vogan plans to take part in the settlement. Other small-business
owners are not so sure.
Jean Hurley of Ellicott City said she and her husband have not yet
decided whether to settle because it would mean backing out of a
class-action lawsuit against NorVergence.
"The settlement just hit my desk," Hurley said last week. Hurley said
her husband's real estate firm, Hobelmann Corp., rented the Matrix box
for $269 a month. "I asked my attorney to look at [the settlement] and
he said it sounded like a good idea."
So far, no one is taking responsibility for the NorVergence debacle.
Salzano, the company's former chief executive, has filed for personal
bankruptcy. Through his attorney, he said his firm was a victim of its
own success. It could not hook up the Matrix boxes fast enough given
its backlog of customers, said Michael D. Sirota, Salzano's attorney.
The leasing companies got spooked by the delay in hookups and refused
to buy rental contracts until the hookups were completed, Sirota said.
"The leasing companies changed the rules of the game on NorVergence,"
Sirota said. "That created a cash crunch for NorVergence and that was
the downfall" of the company because it was financed by selling the
leases to the leasing companies.
As for Vogan and Hurley, they both have their Matrix boxes in their
respective offices, a token of caution when salesmen come calling.
(c) 2005 The Washington Post Company
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