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”.

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