Shareholder suit slams Vonage IPO

Vonage may know how to sell cheap phone calls, but it messed up when it tried to unload overpriced stock, according to a lawsuit filed Friday.

The VoIP service provider presold shares in its May 24 initial public offering (IPO) to its customers. The value of Vonage's stock plunged from its IPO price of $17 on the first day of trading and had dropped about 30 percent by last Wednesday before a modest rebound. Some customers have refused to pay for the shares they had agreed to buy, according to the suit.

Vonage sold its customers on the IPO without regard for whether the investment was right for them, and that blunder helped to sink the stock, the suit alleges. It was filed Friday in the U.S. District Court for the District of New Jersey on behalf of investors in the IPO. Motley Rice, a specialist in class-action lawsuits, is seeking that status for the Vonage case.

Vonage's stock market debut was widely anticipated. The company, a VoIP pioneer in the U.S., Canada and the U.K., achieved dramatic subscriber growth while becoming one of the biggest advertisers on the Internet. But it faces big-name competition from eBay Inc.'s Skype service as well as from cable operators and telecommunications carriers that want to offer "quadruple play" service bundles including Internet access, TV, fixed-line voice calls and mobile phone service.

According to the complaint, Vonage couldn't generate enough interest in its IPO among traditional institutional investors so it turned to its own customers and recommended they buy the presold shares. Vonage asked its underwriters to set aside as much as 13.5% of the IPO shares for its customers, according to the company's prospectus. The company broke an NASD (National Association of Securities Dealers) rule that says a company can't recommend its customers buy its stock unless it has "reasonable grounds for believing that the recommendation is suitable for such customer," the complaint said.

The suit also goes after the investment banks that underwrote the IPO, including Deutsche Bank Securities, Citigroup Global Markets and UBS Securities, alleging they allowed the illegal moves to take place. Vonage protected those investors from liability if customers refused to pay for their shares, the suit says.

Vonage did not immediately respond to questions about the suit.

The IDG News Service is a Network World affiliate.