Lessee Rights Daily Almanac

When Leasing Companies funded services as “equipment”—the fraud and tax consequences cascade.

admin — Tue, 26 Apr 2005 22:14:16 +0000

Among the frauds I have not yet pursued are the fees and taxes that telecom service providers must collect and pay in behalf of their clients and also pay themselves. 200 million dollars in equipment leases were, in fact, 200 million dollars in telecom phone and data services for small businesses paid by leasing companies 5 years in advance of actual delivery. The bank conveyence of an “equipment lease” created a mechanism for evading various data, service and cable taxes and fees due to States and Federal Government.

I am now seeking expert advise in this complex area in order to determine the type and amounts of data, phone and cable fees and taxes that were evaded by Norvergence and their lending partners, the Leasing Companies.

Sarabeth Sealock has been a great help to Norvergence victims. Just today she sent out an email notice–see email below– to her colleagues in the telecommunications service field to help us find an expert who could write an authoritative report. We can then turn over this report to SEC, IRS and US Atorney Criminal Investigators, who are presently looking at the Leasing Companies’ role in the Norvergence fraud.

From: “Sarabeth Sealock DC-98″
To: “Multiple Recipients of Telecom Talk”
Cc:

ALERT….This IS a solicitation for experts/vendors with telecom tax knowledge.

Many of you are familiar with the NorVergence scandal and Rhonda Roland Shearer has taken up the noble cause of exposing all aspects of the involved fraud. Vendors with expertise in telecom tax laws on the state & federal level, please read her message & see if you can assist her with her request.

If you are interested, please contact Rhonda directly per her information below.

Here is a website that documents her accomplishments on the issue to date. It’s an eye opener for those of us who have to dodge fraud and cut costs on a daily basis.
http://www.lesseerights.org/

—–Original Message—–
From: Rhonda Roland Shearer [mailto:rrs@asrlab.org]
Sent: Sunday, April 24, 2005 8:21 AM
To: Sarabeth Sealock DC-98
Subject: Norvergence case: Need Expert that could write up a short report …

Hi Sarabeth,
I am looking for an expert in phone, data and cable tax (specifically the collections and payments due to State and Federal authorities by service providers). I need a short but authoritative analysis that explains the exact taxes that were evaded by Norvergence and their partners, leasing companies, when services were fraudulently sold and paid for as “equipment.” My understanding is that the leasing companies should have collected and paid taxes in behalf of customers, and they should have paid certain other taxes in behalf of themselves.
Many thanks for any advice.
Best regards,
Rhonda
Rhonda Roland Shearer
Director, Art Science Research Laboratory
62 Greene Street
New York, New York 10012
phone 212-925-8812
fax 212-925-0459
http://www.asrlab.org

Tom Salzano’s notes found through the Norvergence Bankruptcy Discovery indicate GE knew that the Matrix box valuation was wrong

admin — Tue, 26 Apr 2005 21:05:44 +0000

Click on note detail below to see full two pages of Salzano’s handwritten documents. Big white-collar criminal cases, such as the recent AIG Insurance fraud conviction, often begin with the discovery of such notes, which can determine what someone knew and when they knew it. The handwritten statement, citing 3 individual points, included “2. Asset Valuation considered wrong at Wells.” Point 3. indicated Salzano believed he needed to contrive a plan in case Wells Fargo Bank balked further–enough to turn and run–at the deal’s inclusion of a false asset valuation.

Leasing Company Denial and Minimization… “Come Hell or High Water?” or Will Discovery of Norvergence Documents Change their Tune?

admin — Mon, 25 Apr 2005 14:26:46 +0000

Leasing Company insiders consistently point out that Norvergence sold leases to lessees and that they were the third parties assigned the leases. The story they tell regarding the Norvergence debacle focuses solely on what lessees did or did not do, or what those 11,000 leases contained. What never seems to be mentioned is the the “Master Lease” deal structure that leasing companies used to foment its contractual “program partnership” with Norvergence long before any lessee signed a Norvergence lease.

One recent example illustrating my point that Leasing Companies try to keep everyone’s attention only on the lessees’ contracts with Norvergence, instead of their own earlier signed Norvergence/Leasing Company agreements, is Barbara M. Goodstein’s recent article in the April 2005 edition of the LJN’s “Equipment Leasing Newsletter,” who writes about the Norvergence case in a piece titled, “Come ‘Hell or High Water’ Norvergence Causing a Stir over Documentation.” (See the link that fellow NVAC member, Rich Bentley posted on the LRA General Bulletin Board, http://www.llgm.com/article.asp?article=1030). There is no mention of Leasing Company Master Lease contracts.

In her last paragraph, Goodstein carefully frames the gentlest possible Leasing Company rebuke into a rhetorical statement that allows the complete escape of any Leasing Company accountability and even furnishes them with readymade excuses. Goodstein writes, “Of course, hindsight is always 20/20 and there are practical limitations to due diligence, but background checks against the principals of a company can be revealing.” Revealing indeed.

The papers between Tom Salzanno and Capital Partners (during mid-2001) illustrate that this Leasing Company was well aware of Tom Salzano’s dark past and the disturbing fact that Tom and his brother were risking hardly any money of their own (”$20,000 per month”). The statements from Tom regarding his “litigation history” included real doozies. Tom writes, ” The banks and various finance companies have already prosecuted numerous judgments against me. My wife has already filed her bankruptcy and been (sic) successfully discharged. I am about to file mine in the next few months if negotiations continue to be stalemated.”

Naturally, Salzano paints himself merely as a victim of circumstance. Documents prove Leasing Companies had no trouble doing due diligence on the Salzanos. It was easy. They knew or could have easily known all of the Salzano dirty laundry right from Salzano brothers themselves.

The Master Lease agreements between Leasing Companies and Norvergence spelled out the due diligence that Leasing Companies would do on Norvergence and the documents they required. Now with discovery, we are also seeing all the contracts and the correspondence between Leasing Companies and Norvergence principals. Material evidence consistently shows that Leasing Companies drafted and controlled the terms within their Master Lease contracts with Norvergence. Leasing Companies drafted the contracts, giving them greater responsibility as drafting attorneys for any ambiguity, and often charged a fee to Norvergence to execute their due diligence ($5,000).

These Leasing Company/ Norvergence Contracts are popping up everywhere through discovery–GE, Wells Fargo, CCL, you name it. “United States: Lease Securitization: New Challenges for Issuers,” 15 April 2005, is an article by Peter Humphreys and Howard Mulligan. It mentions the Norvergence case, also discusses in another section, as if unrelated, Master Leases. They explain how a Master Lease “sets out the basic terms of each lease.” (See LRA Bulletin Board. Chris’s Post refers to http://www.mondaq.com/article.asp?articleid=31971&hotopic=1). In other words, any individual lease Norvergence had lessees sign is only a subset of the larger lease between Norvergence and Leasing Companies that sets out the terms. When these Master Leases are read it becomes impossible for any reasonable person to accept that Leasing Companies excuse and contractually described position– that they were simply “arm-length” 3rd parties.

The fact that Norvergence and Leasing Companies had these Master Leases agreements before any lessee signed exposes their attempts to be perceived as only distant and unrelated 3rd parties to be a self-serving sham. Leasing Companies’ status as a 3rd party is only a contractual manipulation and not material fact.

The goal of Norvergence and Leasing Companies for naming Leasing Companies as bogus 3rd parties was a scheme to increase the value of the leases within their Master Lease. Greater powers for collectibility (Come “Hell or High Water”) resulting from a 3rd party, “holder in due course” status are much more valuable than leases where the Leasing Companies are directly related parties or lessors and therefore, responsible for fraud.

Take off the party hats, Leasing Companies, the party is over.

Write your stories or thoughts about leasing companies and publish them here…

admin — Sat, 23 Apr 2005 12:50:34 +0000

Please Email your articles or horror stories regarding leasing/ finance companies to me at rrs@asrlab.org.
I want to publish them. Thanks, Rhonda

THE STATISTICS OF GREED: The issues with Leasing Companies go beyond Norvergence. Take GE, they are nasty. My office Manager Pat fell and severely injured herself…

admin — Sat, 23 Apr 2005 12:32:07 +0000

…Pat was hospitalized, had surgery. Meanwhile, Pat is now out for over one month. She does ALL the bookkeeping for my personal accounts and various businesses. As part of my accounts, I was helping my daughter out with her $7,000-plus dental bill that was financed by GE.

Since Pat tracks and pays the bills, it’s been difficult to know where everything is and to keep things straight during this period. Because the GE file is my daughter’s, it is not kept among my business or personal bills. I was only reminded of it when I was awakened by a GE dunning person’s call before 8AM. I explained the problem and said I would look for the file and take care of it.

Next thing I know, another GE dunning woman calls. I explain that I cannot find the file and asked her to email or FAX the bill and I would then send a check. She tells me I can just pay over the phone. I tell her I need a bill before paying anything. Totally ignoring the fact that I just told her I don’t have the bill, she claims that she cannot send another bill as they had sent them before.

When I said I will not pay until: 1. I find the bills previously sent; or,2. get a duplicate bill from her now, she said she was “not allowed” to send one. I responded that I would then wait until the next billing cycle.

The woman starts reading a script that she claims she is required to read…stating “this call will now be recorded”;”"your credit will be affected” and whatever, along this vein. When I tried to cut her off by saying that I had just told her the situation, and asked her to send the bill, she states that she is required to read the WHOLE statement. I told her all of this will make no difference to my finances. She threatened me by stating they will keep calling until I pay. I said this is harassment and I would call the police. When she next denied it was harassment and repeated that my credit will be ruined. I then hung up.
This woman was trained and her accompanying script designed to engage the person they are trying to collect from; keep them on the phone. The goal or technique is to make the person from whom they are trying to collect feel bad with statements that are intimidating, bullying, combative, inflexible and unresponsive to anything that person might say.

The facts in my cases were: one bill was unpaid and a second billing cycle just entered. By this woman’s behavior and words, you would think I had been avoiding creditors for months and was a complete deadbeat. And this illusion was GE’s goal. Meantime, the truth is that I am independently wealthy. And yet for GE, none of these facts matter. Bullying, intimidation and threats–they just want their money. It’s like making a deal with mobsters: you better know in advance that you are dealing with thugs who will, in their case, psychologically kick in your kneecaps.

HEAR THIS NOW LEASING COMPANIES. NEVER AGAIN WILL I LEASE OR FINANCE THROUGH YOU.

Leasing is inhumane the way these immoral thugs do business, as we have learned from Norvergence. Leasing and small ticket financing is based totally upon the statistics of greed. Leasing Companies know in advance there will be many defaults and therefore apply aggressive collection techniques on EVERYONE as if they ALL were deadbeats.

At usury rates, leasing companies make billions off the public’s backs. So far, we have put up with accepting this terrible treatment and exploitation. I was describing a reasonable circumstance that created the delay in payment and I was making a reasonable request: please resend the bill. Yet, the way I was treated by this woman was nasty. Her attitude was cynically designed by GE to be so. All for the almighty dollar. It is truly immoral TO OFFER NO KINDNESS OR EMPATHY–IS THE MONEY WORTH IT? GE and other LEASING COMPANIES APPARENTLY BELIEVE SO, AND HAVE BEEN ALLOWED TO GET AWAY WITH BAD BEHAVIOR, IN PART BY US, THE PUBLIC.

I say now, I will never deal with these companies again.

NORVERGENCE AND ITS LENDING PARTNER, THE LEASING INDUSTRY: The Suspect Practice of Lease Flipping Goes Belly-Up

admin — Wed, 20 Apr 2005 19:05:17 +0000

April 19, 2005

NORVERGENCE AND ITS LENDING PARTNER,
THE LEASING INDUSTRY:
The Suspect Practice of Lease Flipping Goes Belly-Up

Rhonda Roland Shearer
Director, Art Science Research Laboratory,
62 Greene Street
New York, New York 10012
rrs@asrlab.org

The small business owner victims of the Norvegence scam told their stories to every conceivable state and federal agency. The story is the same.

Norvergence, a telecommunications provider, found their names through D&B. Calling and writing small business targets with AAA credit, Norvergence salespeople explained that they were partners with Qwest and Nortel, that Norvergence was a pilot project, and that they were simplifying phone and Internet services into one discounted bill. Michael Green, Norvergence Class Action, Lead Attorney, states that the Norvergence web site and its salesperson â€œpitch script,â€ cited promises to â€œreduce costs 20-40% all through a Nortel engineered proprietary technology, the â€˜Matrixâ€™ box. You just had to sign up for the Norvergence ‘Total Solutions Proposal’ with an agreement that bundled telecommunication services and equipment into a monthly fixed cost for 5 years.â€

Searching for www.norvergence.com on the www.waybackmachine.org web site, one finds all copies of the Norvergence web sites going back to 2002 festooned with Nortel and Qwest â€œpartnership programâ€ logos of endorsement. Eleven thousand leases, 11,000 â€œlesseeâ€ victims, and $200 million invested by leasing companies later, Norvergenceâ€™s bankruptcy June/July 04 completely halted the only phone and Internet services these small businesses had. It frequently took months of being â€œdownâ€ before getting reconnected again with IT-T1 services.

Instead of paying one bill from the first invoiced month, as Norvergence promised, lessees paid two bills for the phone services that they, for the most part, received for one year. The cost was determined not by equipment but by the history of that small businessâ€™s phone bills. In my case, the Norvergence comparison of past monthly telecommunications costs and their offer created â€œ0â€ savings. For me, the attractions were a consolidation of many service bills into one and the extra Internet bandwidth. (See illustration on page 267 of my ELA report). [1.]

Why has the Norvergence Fraud Case gained such notoriety, as compared to other Leasing industry scandals? Andrew Alper (Monitor, April 2005) posits that the reason for this high profile coverage is â€œthe involvement of the government authorities.â€ [2.]

Mr. Alper complains about the FTCâ€™s â€œblurred distinctionâ€ between â€œcommercial and consumer transactions,â€ which he states has â€œdifferent statutes and laws.â€ However, if Mr. Alper had called Randy Brook, FTC attorney and author of the FTC document, Mr. Brook would have told him it is â€œthe FTC Act,â€ the law that governs FTC, that â€œmakes no distinction between the commercial and the consumer.â€ [3.] He also would have explained that he and other government agencies got involved because â€œthere were so many injured customers, and they were very vocal. All were small businesses, including: non-profits, churches, government entities, even a Girl Scout Troop have had lots of harm done.â€ [4.]

Michael Green, Norvergence Class Counsel insists â€œit started with the collective voice of the lessees that in an exquisite example of modern-day grass root advocacy rose up from their 11,000 affected small businesses to uniquely find each other and be organized in a way only the Internet can now allow. This translated into dedicated online forums, lessee sponsored websites, attorney networks, government agency action and the filing of 6 class actions nationwide.â€

My point is not to single out Mr. Alper or his articleâ€™s errors and untested assumptions, but to cite him as an example of the industryâ€™s tendency to rely on documents and each otherâ€™s counsel rather than speak directly to those with differing views. This phenomenon perpetuates errors and incomplete information. Embarrassing facts would be revealed by outsiders, not by those who purchased the Norvergence portfolio. The ancient dictum, â€œKeeping your enemies closer than your friends,â€ apparently is not followed in the leasing industry.

Like minersâ€™ canaries, outsidersâ€™ complaints can provide lifesaving warnings and much needed information for the entire leasing industryâ€”especially in a time of crisis.

It is as an outsider that I approach the industry, having examined a thousand documents and spoken to over 100 experts, including industry authorities in FASB 13 lease accounting and insurance, and white collar crime investigators and enforcers. I examine the leasing companiesâ€™ role in the Norvergence scandal through the lens of Bank Fraud, Accounting Fraud, and Insurance Fraud. [5.]

I. Bank Fraud: â€œLease Flippingâ€

A senior IRS Criminal Investigator, a veteran from the 1980â€™s Savings and Loan disaster, upon hearing the facts of the Norvergence Leasing case, said, â€œthis sounds like bank fraud. Land Flipping. Iâ€™d call it Lease Flipping.â€ With this interview, a new category of fraud was coined.

At the heart of a land or property flipping scheme is fraudulent valuations cited within paperwork that allows cheap land to be purchased and sold again, only days apart, at an extraordinary increase in price. The inflated value, of course, has nothing to do with real costs or appraised worth, but nonetheless is used as the basis for a bankâ€™s funding of a loan.

This same flipping structure that allows a banking transaction almost instantly to confer high value to property that was of little value two days beforehand, aptly describes what happened in the Norvergence scam.

Phone and Internet services, were fraudulently labeled â€œequipment.â€ Once masquerading as â€œequipment,â€ telecommunications services only then were able to be placed into a banking conveyance of five-year term â€œequipment leasesâ€ as Leasing Companies do not lease services. The fictional â€œequipment leasesâ€ were approved for funding by leasing companies officers, within the context of their larger vetting and acceptance of Norvergence as an â€œequipmentâ€ vendor. Leasing companies drafted these â€œpartnershipâ€ or â€œmaster lease programâ€ contracts, and often charged Norvergence fees to do their due diligence on Norvergence and the equipment.

Forget that the main named stockholder of Norvergence was part of a recent major telecommunications company bankruptcy, or that Norvergence was a telecommunications start-up company service provider, in which financials showed principals invested only a diminutive $250,000 cash stake. The Leasing Company/Norvergence deal allowed unfunded Norvergence leases with equipment that cost $200 to $1550 to be flipped to leasing companies, or â€œassignees,â€ in two days at an increase ten to one hundred times the original equipment cost. Leasing Companies profited from the high volume of Norvergence â€œequipment lease salesâ€ and their high interest rates.

Norvergence made no cash investment in any lease, and with $1550 underlying the paper, almost instantly received from $10,000 to $200,000 per lease for identical equipment descriptions. What in reality was a portfolio of $17 million maximum value, was funded and booked by leasing companies as over $200 million, invoiced as â€œequipment cost.â€ As in the known land-flipping schemes, such a lease-flipping scheme that instantly ratchets up valuations, also without a basis, are bound to fail–leaving numerous lessee victims, as happened in Norvergence.

The Norvergence Lease Flipping Scheme Unfurled

The essence of the Leasing Company/Norvergence â€œvendor partnership programsâ€ prescribed Norvergence to be a â€œstraw-manâ€ lessor with no investment in the lease and $200 or $1550 equipment underlying the paper valued from $10,000 to $340,000 only after the flipping to leasing companies portfolios. Once Leasing Companies checked a prospective lesseeâ€™s credit, a lessee credit approval or decline was issued to Norvergence.

The contract between Norvergence and Leasing Company next dictated, in most cases, that Norvergence in a â€œprivate labelâ€ agreement signed the Equipment Lease Agreement with lessees, in Norvergenceâ€™s own name, only in behalf of leasing companies.

This truly strange Leasing Company convention of â€œprivate labelâ€ contracts works diametrically opposite to the normal marketing concept. Instead of funding an arrangement where they buy a product and permanently â€œbrandâ€ it with their own name, as in a normal private label marketing device, in the equipment industry, the practice can be used to hide oneâ€™s name instead.

Leasing Companies here, only reserve the right to â€œbrandâ€ and keep the Norvergence name on the lease to cover the two days between the lessee and Norvergenceâ€™s signing of the lease (or the Leasing Companies, with power of attorney signing for Norvergence), and when, two business days later, Norvergence as lessor â€œassignsâ€ the lease to Leasing Companies.

Leasing companiesâ€™ hidden ownership served to deceive Norvergence customers, who would have been alarmed to learn that the document they signed meant two payments per month instead of one, as promised, and that the lease was not with Norvergence, or their â€œpartnersâ€ Nortel or Qwest, but contractually bound them to Norvergenceâ€™s vendor or master lease â€œpartners,â€ mostly big leasing companies. [6.]

This preplanned and contractual sequence of transactions from original lessor (Norvergence, who never funded the lease and only signed it in their name in behalf of leasing companies) to â€œassigneeâ€ (the leasing companies) placed leasing companies in the plum position of â€œholder-in-due course.â€ As holder in due course, leasing companies strategically position themselves in the ultimate status and power for collection from any defaults from lessees â€œcome hell or high water.â€

Most of these Leasing Company/Norvergence â€œMaster Leaseâ€ contracts specify that Norvergence, who started the lessor transactions circle with ownership of a $200 or $1550 piece of equipment, buy back the boxes from the Leasing Company for $1 or $101 at the end of the 60 month term.

CHART

The Lease Flipping Steps: Norvergence as â€œStraw-Manâ€ Lessor

1. Leasing Companies (LCs) and Norvergence sign vendor â€œpartnershipâ€ or â€œMaster Leaseâ€ agreements that stipulates due diligence of vendor and equipment, and Private Label Agreements. Conditions and steps to be taken by both parties are fully outlined. LCs are the drafting attorneys of the agreement. Norvergence is often required by LCs to pay them a fee for processing the LC/Norvergence Master Lease contract (for example, $5,000, to be refunded only after the first million dollars in lease sales). Once LCs approves Norvergenceâ€™s credit, a monthly lease volume program target is set (for example $1,000,000 per month, with a first year limit of $12,000,000). The LCs in most cases take title of the equipment, and /or the contract specifies that Norvergence buy back the equipment ($1 or $101) from the Leasing Company at the end of the 5-year term. Norvergence, in one example, was able to track its â€œVendor Portfolioâ€ through â€œCIT Digital Edgeâ€ online service under a category, â€œEquipment Funding.â€

2. Norvergence begins submitting to LCs lessee credit applications. LC processes all individual lesseesâ€™ credit applications for Norvergence and approves or declines. A Norvergence service contract, with two Nortel logos at the top, is signed by the lessee. The service contract, in contrast to the ERA with its set 60-month â€œrental fee,â€ makes no mention of monies. The only exceptions are when cell phones are part of the service; a monthly cellular access fee (such as $15.99 per handset per month) is then specified.

3. For approved applications, Norvergence has a 5-year â€œEquipment Rental Agreementsâ€ (ERA) signed by the Lessee, and signs themselves (or the leasing company, with power of attorney signs on Norvergenceâ€™s behalf). However, the Private Label Agreement stipulates that this lease is in Norvergenceâ€™s name only, and it is actually the LCâ€™s lease. The â€œNorvergence Lease,â€ in name only, is unfunded except for Norvergenceâ€™s equipment cost of $200 or $1500.

4. Norvergence next sends LC: lessee signed Delivery and Acceptance Agreement (D + A), signed Equipment lease (ERA), equipment invoice and spec sheet at 10 to 100 times the cost. (For example, CCLâ€™s due diligence report, done 10/03, confirms they knew the equipmentsâ€™ inflated value on the ERAs was in steep contrast and had no relationship to the actual â€œSuggested Retail Priceâ€ [SPJ]).

5. According to most Master Lease or Vendor Partnership Agreements, a lease is required to be funded by LC within two business days of Norvergenceâ€™s submission of documents cited in #4 above. (For example, â€œDolphin shall, upon satisfactory verification with lessee, pay to vendor the invoiced equipment cost of the lease transactionâ€). LC funds lease as 2nd leaseholder and â€œarms length,â€ 3rd party â€œassigneeâ€ at 10x â€“ 100x original equipment cost. The lease flip makes the total 17 million dollar Norvergence portfolio worth over 200 million dollars on paper in less than 2 years.

6. FASB 13, EITF 00-21 requirement for proper valuation (using specified methods of Vendor Specific Objective Evidence [VSOE]), separate allocation of services versus equipment costs and correct timing of earnings, is not done either by Norvergence, or LCs as third parties. Insurance charges and profits, insurance loss claims; personal property tax billing, collection and payment; and sales tax collection and payments are all based upon fraudulent equipment valuations of Norvergence equipment, its Matrix boxes. The monthly cost of the Equipment Rental Agreements was determined solely from the lesseesâ€™ prior history of service costs for their monthly telecommunications service (e.g. landline phone, cell phone and Internet access). Phone, data and cable taxes for IT at the state and federal level are neither collected nor paid by Norvergence or Leasing Companies.

7. Most Norvergence /Leasing Company contracts describe a sequence of steps which form a closed loop. The steps started with Norvergence buying $200 or $1550 equipment, and now end here with Norvergence either still owning the equipment or with their buying back the equipment from LCs for $1 or $101 at the end of the 5-year lease term. (â€œInvoiced costâ€ for this same Norvergence equipment also â€œstepped upâ€ its $200 or $1550 value to a range $10K to $200,000K plus, 2 business days after Norvergenceâ€™s purchase).

Where is the bank fraud? Ada Focer, in her article, â€œFlip, Flip, Flip, Flop (Property Flipping and Mortgage Fraud),â€ (NHI: Shelterforce Online Sept./Oct. 2000), in a section titled, â€œPrice versus Value,â€ states that â€œflippers claim if someone is willing to pay this much. That is how much it must be worth.â€

However, truthful valuations in bank funding transactions are the basis for correct calculations of risk, and determine the amount of loan loss reserves. Front-loading 5 years of services, with only $200 and $1550 in equipment in leases and funded by LCs for 10K to well over 200K is a wholly different and greater level of risk than leases with equipment whose Fair Market Value (FMV) or Vendor Specific Objective Evidence (VSOE) value is 10K to 200K at lease inception.

Therefore, it is completely false for leasing companies to declare Norvergence Leases as â€œonly a purchase of income streams,â€ as if one income stream is simply neutral and interchangeable with another. Given a lessee with equal credit and interest rates, the income stream whose basis underlying the paper is â€œnon-rendered servicesâ€ that are front-loaded 5 years ahead of delivery, is not the same income stream of a lease with real underlying equipment values at actual FMV or VSOE paid over a 5-year term.

Need I say, if it were Hoyle for banks to freely fund and book leases whose underlying equipment value is $17 million, as if it were actually $200 million in equipment value, then the entire banking industry would be at risk of collapse. This is why both the specific Norvergence case and this â€œlease flippingâ€ generality are vital areas for IRS, SEC and banking regulators to examine.

II. Accounting Fraud: Unbundling Services and Equipment is Required

The Federal Accounting Standards Board (FASB) Statement 13 and Emergent Issues Task Force (EITF) 00-21 lease accounting rules require that companies do not assume services and equipment values, even if they are split into two separate contracts, as is the case with Norvergence. [7.] Since Oct. 30, 2003, companies must rigorously seek out what is termed Vender Specific Objective Evidence (VSOE) for evaluating equipment and servicesâ€™ equivalent market values, which are then required to be used for making allocations of separately booked and unbundled services and equipment.

EITF 00-21, Number 16, specifically states the criteria leasing companies need to use for the determination of FMV and VSOE in their leasing:

“16. Contractually stated prices for individual products and/or services in an arrangement with multiple deliverables should not be presumed to be representative of fair value. The best evidence of fair value is the price of a deliverable when it is regularly sold on a standalone basis. Fair value evidence often consists of entity-specific or vendor-specific objective evidence (VSOE) of fair value. As discussed in paragraph 10 of SOP 97-2, VSOE of fair value is limited to (a) the price charged for a deliverable when it is sold separately or (b), for a deliverable not yet being sold separately, the price established by management having the relevant authority (it must be probable that the price, once established, will not change before the separate introduction of the deliverable into the marketplace). The use of VSOE of fair value is preferable in all circumstances in which it is available. Third-party evidence of fair value (for example, prices of the vendor’s or any competitor’s largely interchangeable products or services) is acceptable if VSOE of fair value is not available.”

The Xerox Scandal, in which the SEC charged Xerox with accounting fraud in 2002, was a case strikingly similar to the Norvergence debacle. [8.] Xerox had bundled services with their black box and booked both services and equipment in the first year as equipment alone. This booking of services as equipment resulted in revenues being booked years before they were actually earned. This created a distortion in their books. Instead of earnings gradually being earned over the 5-year lease, the first year booking shot the earnings way up that year; in the 4 years that followed, losses appeared.

Due to the Norvergence Portfolio charge-offs, auditing committees at leasing companies likely marched into management offices. I have been told by a retired partner at a Big 4 accounting firm and an expert in leasing, that contracts for services would have a â€œmuch reduced likelihood for collection.â€ The higher risks that LCs took in front-loading service leases would have required much higher loan loss reserves on their Balance Sheets than for equipment leases. Therefore, services, as the underlying basis for leases, were just â€œnot acceptable in terms of collectibility.â€

Did Leasing companies know the true values of the equipment? Due Diligence reports and other documents acquired through the bankruptcy reports suggest yes. By October 2003, CCL had an â€œAsset Management Equipment Studyâ€ done, which revealed that nothing Norvergence offered was new. The report states, â€œSimilar routers cost between $1,000 and $1,500 and with a set of programmed cards the total unit can cost between $5,000 and $6,000 .â€ The study also suggested a â€œ$101 buyout program to Norvergence.â€

Upon receiving my call, Erv Paw, the Senior Consultant at InfoTech, the technology research firm that CIT hired to do a due diligence report, said, â€œI was waiting for someone to call me about this. Youâ€™re the first to call.â€ CIT had done a â€œDue Diligenceâ€ report in April 2004, three months before the Norvergence bankruptcy. In contrast with the CCL study, CIT and Norvergence surprisingly kept cost information in this 11th hour report from its due diligence expert, Erv Paw.

At a meeting of Norvergence, CIT and InfoTech and as represented in the final due diligence report, CIT and Norvergence would only say, to InfoTechâ€™s Senior Consultant, that the price of the Matrix box was â€œtypically $1,000 per unit.â€ However, when still pursuing additional information about pricing, the Info Tech Consultant was told at the meeting that Norvergence would only discuss costs with CIT directly, claiming the information was â€œproprietary.â€ Since the InfoTech Consultant signed a non-disclosure agreement, this did not make sense to him. Later, the CIT officer told him that CIT had cut off funding Norvergence leases by October 2004, a full 6 months before the due diligence report was ordered.

By booking $200,000,000 in telecommunications services as â€œequipment,â€ phone, data and cable taxes for IT at the state and federal level, to this day, have neither been collected nor paid by Leasing Companies or Norvergence. Leasing Companies improperly billed lessees for personal property taxes and other sales taxes based upon inflated and fictional â€œequipmentâ€ costs. At the same time, Leasing Companies through fraudulent book-keeping evaded all taxes required by Federal and State authorities for phone, data, cable services .

III. Insurance Fraud results from False Representations of Values

My study of the insurance fraud involved in the Norvergence case indicates illegal practices inside and outside the boundary of this one portfolio. Insurance fraud follows as both a consequence of the false valuation of equipment at the lease inception and a means for leasing companies (and their insurers) to generate additional profits.

To start off, insurance charges on fraudulently inflated equipment values have resulted in lessees paying excessive fees for insurance to the benefit and profit of Leasing Companies.

How it Worked

Since in their private label agreement, Norvergence only signed on behalf of the LCs and the LCs were to be assignees within two days, insurance was the sole involvement of LCs.

LCs, like CIT, would send a letter providing an â€œinsured valueâ€ to be given to lesseeâ€™s insurer (which generally turned out to be the amount they funded upon receipt of the equipment invoice) and would also cite the insurance premium CIT would charge as a separate line item â€œreimbursementâ€ for selecting their insurance program from Assurant.

One CIT lessee paid over $65 a month, or approximately $780 per year, to insure two Norvergence boxes for equipment whose replacement value was $3,100 for the two boxes. Their total lease amount was a whopping $130,000 for two Norvergence boxes worth only $3,100. Assurant tells me they do not insure services, only equipment. Moreover, they believed the CITâ€™s Norvergence Leases and the â€œinventory amountsâ€ listed for CIT policy were representations of actual equipment replacement values. CIT lessees paid these premiums ranging from $22 to over $65 per month without any disclosures about the exact amount of coverage lessees were receiving, or what the coverage was based upon.

The unfairness for lessees included the conceivable circumstance that upon discovery of the fraudulent insured values, insurers would refuse to pay upon a loss claim, regardless of the lessees having paid inflated premiums. It is also plausible that insurers went along with the deception and did not notify lessees of the fraud, for they were making money too, as is likely the case with Assurant. They as licensed underwriters have been notified by this writer that they and lessees were deceived by false valuations made by CIT, but lessees have yet to be informed by Assurant, or CIT. Assurant, CIT and other leasing companies have not refunded insurance charges. Assurant, likely, without skipping a beat, still insures CIT without penalty resulting from a breach of trustâ€”at the expense of lessees.

Assurant provided me with the rate that CIT was paying for the Norvergence equipment. After doing the calculations, this rate turned out to have nothing to do with the premiums CIT charged lessees. One lessee with a lease signed in July 03 would pay $32.84 per month for two boxes, for a $22,655 insured value; another would pay $24.11 for a $21,902.00 â€œinsured amountâ€; while yet another would pay $29.03 for an insured value of $35,569.00.

Despite the facts that the CIT leases were written in the same months, for the same equipment, using the same insurance company rate, none of CIT â€œinsured valuesâ€ and premium charges correlated. One can conclude, upon information and belief, that either; 1. CIT had its own separate valuations that it used, to base the insurance charge, but which they did not provide to their insurers or lessees; or else, 2. CIT, acted as if they were an insurance company, but acted so without being regulated and without a license. They did their own actuarial analysis, after buying insurance and listing leases on their policy, to determine the rates they charged lessees.

According to the FBI Insurance fraud web site, the fraudulent practice of â€œpocketing premiumsâ€ occurs when high premiums are charged based upon a high â€œinsured valueâ€ given to customers, while a lower amount of coverage is actually purchased. The difference between the actual lower coverage listed in a policy and the higher premiums charged is â€œpocketed.â€ An underwriter at CITâ€™s insurer, Assurant, Maryanne Craig, reported to me that the â€œinventory amountâ€ of my leaseâ€™s actual equipment replacement coverage was only $8650, despite CIT informing me in writing that the â€œinsured valueâ€ was $22,650.

Another overt and troubling aspect of insurance is the collection upon loss of equipment using ten to one hundred times the true replacement value. Norvergence victim Jim Shepherd named Celtic Bank as loss payee through his own policy at The Hartford. After a robbery, he reported his loss of the Norvergence box. Upon the report of this loss, Celtic collected $10,921.75 for the $1,550 Norvergence box from The Hartford. Repeated complaints and concerns from Mr. Shepherd regarding the fraudulent insured value which Celtic provided his insurer went unheeded, excepted for a letter a couple of months later, on Celtic letterhead: â€œDear Mr. Shepherd , â€¦Celtic Bank Corp. has been paid in full with insurance proceeds from the stolen matrix box. No further payment is owed.â€

ENDNOTES:

1. Rhonda Roland Shearer, â€œThe Role of Leasing Companies in the Norvergence Fraud,â€ March 10,2005, Report Prepared For Equipment Leasing Association: The Fourth Annual Investors’ Conference on Equipment Leasing Finance and Securitization, http://www.asrlab.org/temp/ELA_Report.pdf

2. In a phone interview, Mr. Alper told me his analysis was based entirely on the FTCâ€™s Norvergence document
Michael Scott Green, Class Counsel for Norvergence Victims, states, â€œThe laws in the State of New Jersey, where Norvergence had its principal headquarters, likewise, makes no distinction between individual consumers and businesses, and affords all equal protection from fraud and misrepresentation.â€

3. Class Attorney, Mr. Green, has meticulously and vigorously pursued justice for the thousands of small businesses left in debt and without servicesâ€”to the point where a Judge during proceedings advised â€œMr. Green , this is a court case, not a crusade.â€ Mr. Greenâ€™s advice, data and other resources have proved an invaluable contribution for my own research.

4. The list includes: insurance company officers, ELA officers and members, attorneys for leasing companies, academic accounting and leasing experts, FASB staff, valuation experts, Big 4 accounting firm partners (retired and active), Asst. US Attorneys (retired + active), Major Crime Division Postal, FBI and IRS Criminal Investigations Units with varied expertise including bank, accounting and insurance fraud. Lawyers and insurance executive experts in insurance fraud, SEC attorneys and former enforcers (retired and active) are included on the list.

5. Norvergence correspondence with leasing companies reveals that they mutually devised the language â€œEquipment Rental Agreementâ€ instead of calling it a lease because Norvergence noted to leasing companies that a prominent reduction of sales occurred when the term â€œleaseâ€ was used.

6. http://www.iasplus.com/resource/00-21_draft.pdf . This document is marked â€œdraft.â€ However, the final EITF00-21 consensus is the same as the draft form regarding the requirements for unbundling multiple deliverables. Only the draft form is free and online.

7. http://www.sec.gov/news/headlines/xeroxsettles.htm, the SEC press release, â€œXerox Settles SEC Enforcement Action Charging Company with Fraud, Agrees to Pay $10 Million Fine, Restate Its Financial Results and Conduct Special Review of Its Accounting Controlsâ€

8. I hired a licensed telecommunications expert and appraiser to do an appraisal of the two basis Norvergence boxes. This appraisal confirmed the values at approximately $200 and $1550 as has been widely cited as the prices paid by Norvergence to Adtran , the manufacturer. This full appraisal is included in my ELA report, cited above.

Important Topics from Samsonauto

admin — Mon, 18 Apr 2005 20:46:54 +0000

1. Hell or high water clause.

2. Forum selection clause.

3. Waiver of rights for a fair trial and or a jury of your peers.

These are but a few of the unfair clauses that need to be addressed and changed.

Editorial Cartoons

admin — Mon, 18 Apr 2005 19:50:05 +0000

Send in your ideas to be drawn!

“Tokyo Rose” Drawn by Stephen Halker
Concept by Rhonda R. Shearer

Cartoon meanings unpacked–notes

1. Leasing companies as peas in the same pod as Norvergence
2. ELA’s clutches on the Norvergence case as if all members are equal –peas in the same pod
3. ElA’s denial–hearing,seeing and speaking no evil of its members ( ELA’s Prez’s 3 faces)
4. Kit Menkin reveals himself , as literally, “in the back pocket” of ELA and its Prez
5. Like the legend of Toyko Rose, Kit broadcasts dis-information and propaganda in a friendly, seductive and authoritative voice to lessees. He breeds self-doubt, shame, anxiety and feelings of humiliation in lessees’ minds (and dependence upon his on-going opinions), when suggesting, as an “expert,” for example, that it’s somehow the victim’s own fault for signing a contract, etc.

Welcome To Lessee Rights Daily Almanac

admin — Mon, 18 Apr 2005 18:30:41 +0000

Editor: Rhonda Roland Shearer
Please send in your topics to be posted for notices and discussions

Lessee Rights Assnâ€¦â€¦

1. Guest Book for single statements
2. General Discussion Board For posting notices and 2-way Threaded Discussions
3. The Daily Almanac where specific topics are posted and comments are made to serve as a resource for important and current information about lessees and their rights

WHAT? A TAX ON TOP OF A PROPERTY TAX ?

admin — Sat, 29 Jan 2005 15:14:33 +0000

Who ever heard of taxing– a tax –since the Boston Tea Party in the 18th century? Click on image to see the whole invoice. Most states require a personal property tax to be paid Dolphin told me they collect taxes on the property tax from lessees, in addition to the tax itself . Patty Sullivan, a Dolphin representative said Floridia requires them to consider the reimbursement of property taxes by lessees to Dolphin Leasing to be income to Dolphin. Therefore, Dolphin also requires lessees to pay that tax too.

The problem with the Norvergence leases is the fraudulent valuations of the leased equipment cheated lessees out of thousands of dollars. Leasing Companies charged lessees for an annual property tax that was, in almost every case, MORE THAN THE TOTAL VALUE OF EQUIPMENT! Take the invoice below. The $219.79 total of property tax and the tax on that tax, was more than the Matrix SOHO’s cost, at $200.

Everyone should follow Norvergence victim, Rich Bentley’s lead. He has demanded his money back from his Leasing Company. (His and Bill Fry’s saga I will detail next week).

As a Norvergence Victim’s Action Committee project, we call on all Norvergence lessees who were charged a property tax by their Leasing Company to send them a demand letter for a refund of the property tax paid beyond the actual value of the equipment. The letter should states the amount of tax paid and a printed copy of the official appraisal that is included in my report “The Role Of Leasing Companies in the Norvergence Fraud” The letter should underscore your demand for an immediate refund of any and all fraudulently collected taxes.

There are no excuses. All Leasing Companies know by now the true value of the equipment. And yet Leasing Companies have not contacted lessees to right this wrong. Why didn’t the Attorney Generals require refunds of fraudulently collected taxes and insurance premiums within their settlements with Leasing Companies? Left to profit from this fraud Leasing Companies are left unpunished and encouraged to do it again. Lessees are left unfairly exploited.

NVAC will post a notice for the marshalling of lessees to ask for property tax refunds from Leasing Companies next week.

Canada Overnight Phentermine