FTC Settles NorVergence Case

June 27, 2006

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The Federal Trade Commission has settled charges in the NorVergence telecommunications fraud case against the company's founders and principals, Thomas N. Salzano and Peter J. Salzano.

Under separate settlements, the final court orders will bar the Salzanos from engaging in all fraudulent and deceptive conduct alleged in the complaint, require them to make specific disclosures when pitching products in the future, and subject them each to $50 million monetary judgments, which are mostly suspended.

As described in an FTC complaint filed in 2004, NorVergence defrauded small businesses, nonprofit organizations, churches, and municipalities through misleading claims of dramatic savings on their monthly telephone, cellular, and Internet bills.

NorVergence claimed that substantial savings would be generated by a "Matrix" black box that it would install on consumers' premises. Among a confusing set of applications and agreements that consumers signed was a long-term rental agreement for the Matrix box costing hundreds, or even thousands, of dollars per month.

In fact, the Commission contended, the Matrix products were standard integrated access devices (or sometimes just fire walls) that did not save any customers money. Further, NorVergence had no long-term contracts with telecommunications providers and no way to assure the long-term discounts it promised.

Instead, the FTC charges, NorVergence immediately sold the black box rental contracts to 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 scheme collapsed when NorVergence was unable to provide services or pay its suppliers.

The FTC also alleged that NorVergence rental contracts contained clauses that purportedly required customers to pay even if NorVergence failed to provide any services and allowed the finance companies to seek collections in any forum they chose, making it very difficult for customers to dispute the monthly rental fees.

Ultimately, consumers were burdened with long-term equipment rental payments for which they received no telecommunications services. The NorVergence litigation ended with a default judgment for the FTC in July 2005.

The court settlements impose a range of conduct prohibitions on the Salzanos in connection with offering or providing any products, services, or financing to consumers. Specifically, the orders prohibit any future misrepresentations about cost savings, or about the nature, terms, and purpose of sales or financing contracts signed by consumers.

Further, the orders require the Salzanos to make affirmative disclosures when they sell or finance any telecommunications services, including: 1) the nature of any long-term commitment, or lack thereof, from any provider of services they promise to consumers; and 2) that any telecommunications equipment they provide may be of little or no value without the provision of services.

In addition, the orders bar the defendants from providing others with the means, through contract provisions or otherwise, to file court actions in distant locations where consumers would be unable to defend themselves or to misrepresent consumers' obligations to pay for products or services.

Finally, the orders include a $50 million judgment against each of the Salzanos. The entire judgment against Thomas Salzano, and $40 million of the judgment against Peter Salzano, are suspended due to inability to pay. The FTC will also have an allowed claim of $10 million in Peter Salzano's bankruptcy.

How much of that amount will be received by the FTC will depend on whether there is any money remaining to pay unsecured creditors.

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