FTC Charges New Jersey Company with Defrauding Consumers Through Sale of its 'Matrix' Telecom Service

The Federal Trade Commission has charged New Jersey-based NorVergence, Inc. with defrauding consumers through misleading claims that it would provide them with years of dramatic savings on their monthly telephone, cellular, and Internet bills. It also falsely promised to provide unlimited long-distance and cellular minutes at no extra cost.

NorVergence claimed that part of the savings would be generated by a "Matrix" black box that it would install on customers' premises. In reality, according to the FTC, the black boxes, which NorVergence rented to customers for inflated prices of between $400 and $5,700 per month, were nothing more than standard telephone routers and had little or nothing to do with savings.

In fact, the Commission contends, 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.

In filing its complaint in federal district court, the FTC also alleged that NorVergence rental contracts, which it sold to finance companies, 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.

NorVergence's Alleged Business Practices

Based in Newark, New Jersey, NorVergence is a New Jersey corporation that, prior to filing for bankruptcy in July 2004, sold and financed telecommunications services and related products to small businesses, nonprofit organizations, churches, and municipalities. The company marketed its products as integrated, long-term packages, including landline and cellular telephone services and Internet access.

Starting in 2002, and continuing until it filed for bankruptcy, NorVergence's sales staff cold-called small businesses, offering to save them at least 30 percent on their total telecom bill. Using a "savings analysis" sheet, the sales representatives explained that by installing a "black box" - typically called the Matrix or Matrix 850 - at the customer's place of business, NorVergence would be able to provide such savings over the long term. In reality, the "black box" was a standard integrated access device, commonly used to connect telephone equipment to a long-distance provider's lines.

According to the Commission, these agreements were confusing and difficult to understand. One document (called a "rental agreement") required customers to pay between $400 and $5,700 per month for each Matrix 850 box, usually over a five-year term. Another document was a nonbinding agreement by NorVergence to provide telecom service at the stated price for the same term. After getting a customer to sign the agreements, NorVergence sold or assigned the rental agreement to a third-party finance company for a discounted amount of the total rental price. The fine print in the rental agreements allegedly provided that the finance companies could insist on full payment from the customers even if NorVergence failed to provide the services it had promised. Finally, language in the agreements enabled the finance companies to attempt to collect from customers in venues far from where they were located making it difficult for them to dispute the charges in court.

The Commission's Complaint

According to the Commission's complaint, NorVergence violated Section 5 of the FTC Act by misrepresenting that: 1) customers who paid for a rental agreement and associated service agreements would receive long-term discounted telecommunications services; 2) the company would treat the applications, forms, and rental agreements signed by the customers as a unified agreement under which it would provide telecommunications services in exchange for customer payments; and 3) the equipment listed in the rental agreement would lead to substantial telecom savings.

The FTC contends, however, that consumers did not receive the long-term savings they were promised, and NorVergence did not treat the multiple contracts as one agreement to provide consumer services. Instead, NorVergence treated the rental agreement as a separate hardware financing agreement so it could sell that agreement and receive the rental income up-front, regardless of whether it provided the promised services. In addition, the FTC charges that the equipment listed in the rental agreement did not create the savings promised consumers and only provided minimal savings, if any at all.

The complaint also charges NorVergence with deceptively representing that consumers would receive substantial discounts related to their telecommunications services without disclosing that: 1) it had no long-term commitment from any service provider for the services it promised consumers it would provide; and 2) the equipment covered by the rental agreement would be of little or no value to the customer if NorVergence failed to provide the promised services. The FTC also claims that in connection with selling and financing the telecommunications products it provided, NorVergence's practice of including contract provisions authorizing the filing of lawsuits in geographic areas far from where the contract was signed was likely to cause substantial consumer harm that customers could not reasonably have avoided.

Finally, the Commission's complaint charges NorVergence with providing others with the means to commit deceptive and unfair acts by furnishing third-party finance companies with rental agreements it signed with its customers. By providing the agreements, NorVergence allegedly facilitated the finance companies' ability to file collection suits in areas outside of where the contracts were signed and to demand payment even if the consumers received no services.

The Commission vote authorizing the staff to file the complaint was 5-0. Through the complaint, filed November 4, 2004 in the U.S. District Court for the District of New Jersey, the FTC is seeking to permanently bar the defendants from violating the FTC Act in the future and to secure financial redress for consumers defrauded by NorVergence's alleged conduct. The remedies sought may include restitution, the rescission of existing contracts, and the cancellation of consumer debts claimed by the company.

NOTE: The Commission authorizes the filing of a complaint when it has "reason to believe" that the law has or is being violated, and it appears to the Commission that a proceeding is in the public interest. A complaint is not a finding or ruling that the defendants have actually violated the law.

Copies of the Commission's complaint are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. 042-3184; Civ. No. 04-5414)