Vonage Sued By Shareholders

by alec on June 5, 2006

It appears that Vonage’s (VG) worst nightmare is about to come true.  South Carolina based Motley Rice (motto: “Litigating Today For a Better Tomorrow”) has filed a class action suit on behalf of Vonage Shareholders, alleging improper conduct in the sale of pre-IPO stock to Vonage customers.  There are a number of things said, but the most outrageous is the claim that Vonage, failing to sell the stock to institutional investors, then turned to its own customers.

The Complaint further alleges that, Defendants, realizing that institutional investors who normally buy in IPOs would be reluctant at best to purchase Vonage shares as-priced, pre-sold at least 13.5% of the Company’s IPO shares to Company customers in violation of NASD Rule 2310. NASD Rule 2310 requires that a company recommending the purchase or sale of its securities to a customer must have a reasonable basis for believing that the recommendation is suitable for the customer. The Complaint also alleges Defendants had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability.

It appears that Vonage management may have been actively contemplating scenarios like this for some time.  Kathleen Day, writing in Saturday’s Washington Post, outlines a number of possible scenarios, including the uncomfortable spot that Vonage would find themselves in if they were to sue customers who refused to complete the purchase of IPO shares.

Other blogosphere commentary takes Vonage shareholders to task for wanting a risk-free ride on the IPO. As Cynthia Brumfeld commented, “it’s only the beginning of a very ugly ride for Vonage”.

{ 4 comments… read them below or add one }

mark evans June 5, 2006 at 4:02 am

alec,
talk about a disaster! the stocks down nearly 30% and i think this lawsuit is just a sign of things to come. i'm still puzzled why anyone would have bought into the IPO given all the negative sentiment towards the deal and the company. you would have thought savvy investors would have waited to jump in post-IPO.

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Alec June 5, 2006 at 4:31 am

i think there's some validity to the point being made in the suit, mark, which is that it wasn't savvy investors buying the stock. it was vonage customers!

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brainiac June 5, 2006 at 3:46 pm

With respect, what if the stock went up? Would there be a lawsuit? What if the 10,000 purported investors bought but they could not sell and the stock soared?

Amazing what a bunch of classless lawyers will do to earn abuck.

I bought into the IPO with the realization that someday the company will make money. Explain the value model of Skype?

Long term buy is the way to look at vonage not short term blip on the investment radar screen. Loyal customers should buy now and hold they'll make more.

The travesty is the investment banks, they botched everything. Seems to me if one were to file a complaint the ever salient bankers looking to make a fee should take a haircut, they gave the advice on pricing and purchasing.

Go Vonage, I love the serivce and will hold the stock

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Alec June 5, 2006 at 5:52 pm

Hey Brainiac — more power to you. I hope it works out, but I can't say I have your optimism.

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