One of the scariest equipment-leasing tales in years is unfolding in a Newark, N.J. bankruptcy court, involving two fast-talking brothers who hauled in millions hawking a mysterious blue box they called the "Matrix."
Their company, Norvergence, was founded by Peter Salzano and Thomas N. Salzano in 2001. They used the Matrix to turn Norvergence (2003 revenues: $143 million) into a powerhouse reselling telecom services. Powerhouse, that is, until the privately held Newark company was forced by creditors into Chapter 11 bankruptcy in June.
In its three years of existence Norvergence hired 1,800 sales and other employees, who called on travel agencies, print shops and real estate brokers -- businesses with little tech savvy. The pitch was that the Matrix would deliver unlimited broadband, landline and cell phone service with no per-minute charges. The Matrix, the company touted, was a "merged access transport intelligent exchange" whose "algorithms create the most efficient use of T-1 loops ever."
It was customers who were thrown for a loop. "The Matrix is a fraud," says Barry Bellin, a Teaneck, N.J. telecom consultant who has installed the boxes. The box is no more than a firewall and router made by Adtran, a Huntsville, Ala. company. The Matrix can't by itself provide an Internet connection or save telecom costs. Bellin says the boxes were used mainly to route long-distance calls through Qwest, which had sold minutes to Norvergence at wholesale rates.
Bruce Konecky, owner of JBQ Printing in Millburn, N.J., signed a five-year Matrix $300-a-month lease. "All the box did is flash its green lights on and off," he says. Bankruptcy trustee Charles Forman says 7,200 Norvergence customers are locked in to such leases, totaling $230 million. Norvergence already got its money, having sold the leases to leasing and banking companies. Creditors Qwest and Sprint say they're owed $30 million. Good luck. Tom Salzano's last startup, telecom reseller Minimum Rate Pricing, also went bankrupt, leaving creditors like WorldCom and Access Capital $67 million poorer.
Where did the money go? Trustee Forman is investigating the trust set up by Tom Salzano that owns a 76% stake in the company. Forman is also looking into whether Salzano diverted some of Norvergence's cash to bank accounts outside the U.S. Creditors in his earlier bankruptcy discovered he transferred $2.7 million of company funds to an account at Bank Julius Baer in Switzerland.
Neither brother responded to inquiries made to their lawyer. Forman canceled a creditors' meeting when the Salzanos failed to show up. A source close to the bankrupt company says the brothers are busy now -- planning another telecom startup.
© 2012 Forbes.com