Capital Markets

Vonage IPO Prompts Investor Lawsuit

Complaint alleges not only that the Internet phone company sold many shares to ''unsuitable'' investors, but also that it indemnified underwriters ...
Stephen TaubJune 5, 2006

After a company’s share price suffers, a shareholder lawsuit against the company and its top executives is hardly unusual. No surprise, then, that Vonage Holdings has been targeted by the plaintiffs’ bar after its share price plunged about 30 percent just one week after its initial public offering.

In its complaint, law firm Motley Rice alleged that the Internet phone company and certain officers and underwriters published a materially false and misleading registration statement and prospectus. The firm also alleged that the company and insiders, who had invested hundreds of millions of dollars of their personal funds in the company, were losing money — and as an exit strategy, embarked on an illegal course of conduct to sell Vonage shares to the public.

The suit also raises some unusual issues, however. It accuses Vonage, which pre-sold at least 13.5 percent of the IPO shares to its customers, of violating NASD Rule 2310, which “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.”

About 10,000 of Vonage’s customers agreed to buy shares at the IPO price of $17, reported Bloomberg, but after the share price plummeted, some customer have said they wouldn’t pay for their shares. The company responded by threatening to sue, the wire service added.

The company “improperly crammed investors into the Vonage IPO regardless of their suitability,” according to Motley Rice. Further, the law firm alleged that Vonage agreed to indemnify the underwriter defendants against certain liabilities relating to the customer pre-sale program — among them, “the foreseeable possibility” that customers who bought shares through the IPO would refuse to pay.

The company would not comment on the lawsuit, according to the Associated Press.