Investors sue Vonage over IPO

Shareholders file a class action lawsuit against the Internet telephony provider in the wake of its disastrous IPO.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
2 min read
Internet phone provider Vonage is being sued in a class action lawsuit on behalf of shareholders who bought stock in the company prior to its initial public offering.

The suit filed on Friday in the United States District Court for the District of New Jersey by the Atlanta-based law firm Motley Rice asserts that the Internet telephony provider, its officers and the IPO's underwriters misled investors.

Vonage's stock, which debuted on the New York Stock Exchange on May 24 at $17 per share, has lost about 30 percent of its value in its first seven days of trading. The complaint filed against Vonage claims that the company's investors were motivated to push for an IPO because the company had been losing money, and the investors were desperate for an exit strategy. Vonage raised about $531 million from the offering.

Vonage had taken the unusual step of offering about 13.5 percent of its IPO shares to customers. The complaint alleges that Vonage's officers decided to offer shares to customers because they knew institutional investors who normally buy IPOs would be reluctant to buy Vonage stock. Vonage has consistently lost money and has never been profitable.

Since the rapid decline of the stock, some of Vonage's shareholders have threatened not to pay for the shares they were allocated. But Vonage said last week through a statement that it will pursue payment from anyone who was allocated shares.

The suit further alleges that Vonage and its underwriters-- Deutsche Bank, Citgroup and UBS--violated a securities law that "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 law firm said in its statement.

The complaint asserts that Vonage "had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability." It further says that the underwriters who should have been making sure the customers were suitable candidates for the stock did not fulfill their obligation.

Vonage representatives were unavailable for comment.