The smooth-talking salesman with his glossy brochure promised Kelly Vogan huge savings on his firm's telephone, cell phone and Internet bills if only he'd rent a "revolutionary" piece of high-tech gadgetry called the Matrix box.
With the lure of 30 to 60 percent savings, Vogan signed up with New Jersey-based NorVergence Inc. and even insured the small red box as required. He paid $435 a month to rent the box and an additional $13 for services, including unlimited long distance.
Last summer NorVergence filed for bankruptcy, and customers like Vogan, who owns a home remodeling firm in Silver Spring, found that their troubles went far beyond the loss of phone service. They discovered they were obligated to keep paying rent on the boxes to third parties, which had bought the rental contracts from NorVergence.
"The more I think about it, I'm not sure I even understand how it all worked," Vogan said. "But it worked just fine for a while."
Vogan's company and 11,000 other small businesses nationwide are entangled in an alleged scam that has attracted attention from the Federal Trade Commission and attorneys general in about two dozen states.
In the Washington area, at least $6.6 million in rental fees owed by 350 businesses in the District and Maryland is at stake. Numbers for affected Virginia firms are not available.
The fallout from NorVergence's collapse illustrates how vulnerable small-business owners are to those who prey on their lack of technology know-how, said Jonathan Zuck, president of the Association for Competitive Technology, which represents small information-technology businesses.
"Small-business owners are particularly susceptible to fraud . . . because they lack in-house expertise" and sometimes end up overpaying for services, Zuck said.
The FTC, for example, charges that the box NorVergence persuaded its customers to rent was nothing more than a mix of standard routers that help connect telephone equipment to long-distance providers' lines.
NorVergence and its former chief executive, Peter J. Salzano, deny any wrongdoing. NorVergence filed for Chapter 11 protection in June 2004. The filing was later converted to Chapter 7 liquidation.
The FTC accuses NorVergence of defrauding customers by charging inflated rents for the boxes -- $400 to $5,700 a month -- and then selling the rental contracts at a discount to third-party 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 FTC said in November when it filed a civil action against the company in U.S. District Court in New Jersey.
Here is how it worked: NorVergence bought services, such as e-mail and Internet connections, from well-known firms such as Qwest Communications International Inc. or Sprint Corp. at wholesale rates.
It would then re-brand, re-price and resell the services under its own brand name, while making money off the box rentals. In the brochure presented to Vogan, NorVergence promoted its partnership with Qwest and Nortel Networks Corp. Both those firms distance themselves from NorVergence.
"We did not lend our name. That was used without our permission," said Claire Mylott, a spokeswoman for Qwest. "The reason we don't lend our name [to any vendor] is because we can't control how our name would be used."
Bryan Zidar, a spokesman for T-Mobile USA Inc., which provided handsets to NorVergence, said his firm was as much a victim of NorVergence's situation as the many small-business customers.
"When NorVergence filed for bankruptcy, we were owed significant money," Zidar said. "So we asked the judge for the monies owed. We didn't get it. But we were granted the opportunity to reach out to wireless customers with T-Mobile handsets and switch them over to T-Mobile service."
Vogan said he got a similar offer from Sprint and switched over as soon as he learned of NorVergence's bankruptcy. Had his troubles ended there, Vogan would have brushed off the episode as a minor inconvenience.
Instead, the finance company in charge of his rental contract continued to bill him $435 a month for his Matrix box. That is because the fine print on NorVergence's rental agreements locked customers into long-term contracts even if NorVergence failed to deliver service.
In Vogan's case, that meant he was responsible for an additional $19,000 to cover the balance of his five-year contract. Reluctantly, he paid the monthly fee to protect his company's credit. Others who refused to do so found themselves engaged in legal battles when the finance companies sued them.
"It was frustrating," Vogan said. "I had about 31/2 years worth of payments left on my contract and I had nothing to show for it but a useless red box."
But relief is in sight.
Last month, a few of the 40 finance firms that handled NorVergence's rental agreements agreed to forgive most of the debt owed under a settlement reached with attorneys general in 18 states.
In Maryland and the District, settlements were reached with CIT Technology Financing Services Inc. and CIT Group/Equipment Financing Inc., General Electric Capital Corp., U.S. Bancorp Business Equipment Finance Group Inc., and Wells Fargo Financial Leasing Inc.
Each firm agreed to forgive about 85 percent of the rental fees. If a small business has paid more than the 14 or 15 percent due after July 2004, it will receive a refund of the amount it paid over that percentage.
The deal wipes out $5.7 million in debt for 278 businesses in Maryland and $924,000 in debt for 39 businesses in the District.
"We believe we have done the best we can do," said Maryland Attorney General J. Joseph Curran Jr. "We were not able to convince the finance firms to take the entire loss. They came back and said: 'We are victims too. Why should we suffer the entire loss?' "
Vogan plans to take part in the settlement. Other small-business owners are not so sure.
Jean Hurley of Ellicott City said she and her husband have not yet decided whether to settle because it would mean backing out of a class-action lawsuit against NorVergence.
"The settlement just hit my desk," Hurley said last week. Hurley said her husband's real estate firm, Hobelmann Corp., rented the Matrix box for $269 a month. "I asked my attorney to look at [the settlement] and he said it sounded like a good idea."
So far, no one is taking responsibility for the NorVergence debacle.
Salzano, the company's former chief executive, has filed for personal bankruptcy. Through his attorney, he said his firm was a victim of its own success. It could not hook up the Matrix boxes fast enough given its backlog of customers, said Michael D. Sirota, Salzano's attorney.
The leasing companies got spooked by the delay in hookups and refused to buy rental contracts until the hookups were completed, Sirota said.
"The leasing companies changed the rules of the game on NorVergence," Sirota said. "That created a cash crunch for NorVergence and that was the downfall" of the company because it was financed by selling the leases to the leasing companies.
As for Vogan and Hurley, they both have their Matrix boxes in their respective offices, a token of caution when salesmen come calling.