What’s Left In NorVergence’s Wake?

Mike Pimentel, a family doctor based in Maryland, received a call this winter from a NorVergence representative.

NorVergence pledged to consolidate his phone bills and provide a T1 line that would allow the physician to transmit copies of aviation medical exams at higher speeds than over his dialup Internet connection.

It sounded like a good deal, but these days the physician is living a telecommunications nightmare.

NorVergence is bankrupt. And the company that holds a five-year lease Pimentel signed with NorVergence - Popular Leasing USA Inc. - is demanding he pay $19,000 over the term of the agreement for a piece of equipment that is basically useless. That is because NorVergence never activated services at the doctor’s office. Pimentel says he cancelled a $1,300 payment he made to Popular Leasing; now, he says, Popular Leasing reports he is in default.

“The leasing company should have known before accepting the lease from NorVergence what the collateral was on the equipment they were leasing,” Pimentel says. Popular Leasing did not return phone calls seeking comment.

The doctor definitely is not alone. Former NorVergence customers say Popular Leasing and other firms that hold NorVergence’s equipment leases are demanding monthly payments even though the businesses no longer receive telecommunications services from NorVergence - a company that is in the process of being liquidated under bankruptcy. A U.S.

Trustee overseeing the bankruptcy case did not return a phone call seeking comment.

Cary Silverman, president and CEO of TeleSource Solutions, a consulting firm and telecom agent based in Georgia, says the predicament businesses face stem from the biggest scam he has seen during his 23 years in telecommunications. Silverman says NorVergence included in the contracts a provision that reserved the right to sell the lease on a piece of equipment to a third party. An attorney representing NorVergence in the bankruptcy did not return calls seeking comment about the company.

“These leasing companies are going after these customers hard and fast,” Silverman says.

NorVergence was marketing the so-called MATRIX box, a device made by ADTRAN Inc., as a piece of equipment that could cut telecommunications costs when its function is really to divert voice and data connections over a T1 line, Silverman says. (ADTRAN did not immediately return a call seeking comment about the cost of the equipment.) Silverman says a telecommunications company typically lends the equipment to customers. “NorVergence was selling it as some kind of magical box” at “exorbitant amounts of money,” he says.

NorVergence has been the subject of grievances for at least the last year.

The division of consumer affairs within the New Jersey Attorney General’s Office has received 34 complaints from the public about NorVergence since June 2003, according to spokesman Brian Lamm. The division is sharing information with the New Jersey Board of Public Utilities. Lamm says it is the division’s policy to neither confirm nor deny whether an investigation is pending. The complaints “allege problems with service quality, billing issues and unconscionable business practices,” he says.

Popular Leasing and two other firms - OFC Capital and Partners Equity Capital Company - filed claims against NorVergence this summer, driving the company into Chapter 11 bankruptcy. A judge converted the case into a Chapter 7 bankruptcy to liquidate assets after the company failed to present a reorganization plan.

Qwest Communications International Inc. is among NorVergence?s creditors. NorVergence used Qwest to provide T1s and long-distance service, says Dan Baldwin, founder of the Telecom Agent Association (TAA).

NorVergence tapped Covad Communications Group Inc. to provide DSL and most recently used Sprint PCS and T-Mobile USA Inc. as its wireless operators, Baldwin says.

On a Yahoo! Groups’ Web site dedicated to the NorVergence fiasco, numerous businesses have shared their stories. “These boxes are worth bupkiss and they [knew] it when they took the lease,” writes one person. “I think the first judge that gets this case in front of him is going to say the same thing. These lenders gave NorVergence unsecured funds based on our credit ratings.”

A cooperative representing businesses and administered by the TAA has retained a law firm, Weir & Partners, Baldwin says. “Filing a lawsuit against the leasing companies is envisioned but the attorneys are all still doing their homework regarding feasibility,” Baldwin says.

Businesses signed two separate agreements with NorVergence: a service agreement and an equipment rental agreement, according to Sigmund Fleck, a partner with Weir & Partners. Fleck says he is still investigating the case to see what, if any, legal action can be taken on behalf of businesses.

The equipment rental agreement includes a “hell or high-water” clause that requires the lessee to continue making rental payments under all circumstances regardless of whether the service is working, and there also is a disclaimer of all warranties in the agreement, the attorney says.

“It’s not that uncommon in the world of leasing for these leases to exist,” he says. “Financing of these leases is an important part of the American economy and the paper has to be able to move freely. …There’s got to be certainty.”

The equipment rental agreements businesses signed with NorVergence include obligations ranging from $16,000 to “well into six figures” over a five-year period, Fleck says. “There doesn’t seem to be any correlation between any piece of equipment and the actual rental agreement,” he says.

Fleck says it appears NorVergence entered rental agreements with businesses and then sold or assigned the leases into the secondary market. However, he is still investigating the manner in which NorVergence transferred the agreements.

Meghan Cummings, a partner with Cummings Partners, a point-ofpurchase display design manufacturer in New Jersey with 11 employees, is another small business owner who reports being swindled by NorVergence.

Cummings Partners signed a contract with NorVergence, expecting to save $300 a month, Cummings says, but NorVergence never activated services over a T1. Cummings says the company that now holds the lease - Irwin Financial - is demanding approximately $550 a month.

She says her company paid Irwin Financial $3,000 because NorVergence had promised to reimburse the company. Irwin Financial could not be reached for comment.

Facing the same predicament as other former NorVergence customers, Cummings does not believe what has happened is fair, yet she does not know what to do about it. “I think clearly this situation is illogical and that’s the only thing I can come up with,” she says.