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Short selling implicated in poor-performing Vonage IPO

NYSE consults Wall Street dealers to see what impact short selling might have had on stock decline.

The New York Stock Exchange is looking into how short sellers may have contributed to the sharp decline of Vonage's stock after it debuted two weeks ago.

Regulators from the NYSE sent a letter to Wall Street securities firms on Thursday asking how dealers may have facilitated the short sellers' trades, according to a story published Friday by The Wall Street Journal.

Short sellers make money by betting a stock will decline in value. They borrow shares of the stock and sell it. Then they buy back the stock at a lower price hoping to make a profit. Because short sellers can drive down the price of a stock, they are often blamed when share prices decline rapidly.

In recent years, the U.S. Securities and Exchange Commission has adopted stricter rules for short sellers, tightening regulations around what is known as "naked" short selling, which refers to the practice of selling shares that have not yet been borrowed.

According to the Journal report, the letters sent to dealers questioned whether these rules had been broken in the case of the Vonage stock.

Officials at the NYSE could not comment on the Journal article, and Vonage representatives did not return phone calls.

Vonage, the Internet company that turns broadband connections into phone lines, debuted on the NYSE on May 24 at $17 per share. In a little over a week, the stock had lost about 30 percent of its value. Critics have come out of the woodwork questioning the price set for the initial public offering, given that the market was already in decline, and that Vonage had taken the unusual step of offering about 13.5 percent of its IPO shares to its customers.

Some of Vonage's shareholders have threatened not to pay for the shares they were allocated. And now, some disgruntled investors armed with lawyers have filed class action lawsuits against the company.