Vonage IPO Woes Continue

And now come the lawsuits.

First came Vonage’s IPO, which was followed by a 30 percent tumble in the price. Then Vonage threatened to sue customers who got cold feet on buying into the IPO.
Now the embattled VoIP provider faces a class-action lawsuit charging customers were “crammed into the Vonage IPO regardless of their suitability.”

Investors were damaged by mistakes made by Vonage and the IPO
underwriters, according to the lawsuit filed on Friday in a New
Jersey federal court. The lawsuit alleges a desperate Vonage and
underwriters, motivated by millions in fees, violated stock security rules.

The mistakes “decimated the price of company shares” and
“investors saw almost $200 million, or 30 percent of their investment
in the company, eviscerated,” according to the lawsuit.

“We have no comment for now,” Vonage spokesperson Mitchell Slepian told

The Internet phone company “embarked on an illegal course of
conduct to sell shares,” according to a statement. The law firm
characterized Vonage executives, seeing the company lose money,
“desperate to execute an exit strategy for themselves.

The suit follows a warning by Vonage that customers who took part
in the “Directed Share” program are “obligated to purchase their
share allocation from the underwriters.”

The VoIP company also is not
offering to buy back any shares, according to the statement.

Vonage customers who bought stock prior to the IPO for $17 per
share saw the stock open and then quickly drop to as low as $11.52.
At mid-morning today, the stock was selling at $12.38.

Some 10,000 Vonage customers bought shares at the pre-IPO price.

In the most recent lawsuit, Atlanta, Georgia-based Motley Rice
LLC, charges Vonage sold 13.5 percent of the IPO stock to its
customers without an understanding the stock was suitable, violating
NASD rule 2310.

Vonage “had no reasonable basis in this case and improperly
crammed investors into the Vonage IPO regardless of their
suitability,” charged the law firm in a statement.

Customer-participation in IPOs brings potential headaches. Key to a successful IPO is doing it right and
maintaining control.

“Unfortunately, Vonage has gotten none of that,”
said Tom Taulli, a University of Southern California finance professor and
author of “Investing in IPOs.”

Vonage had amended its May 22 SEC filing, noting its IPO may have
included errors. The amendment followed complaints from customers
confused by how they were notified and stymied in efforts to links to
the prospectus.

The VoIP player also indemnified the IPO underwriters in case of
problems with the customer purchase program, a move noted in the
class-action lawsuit.

“Motivated by the tens of millions of dollars in fees” and having
“little or no incentive to ensure that customer participants in the
IPO were suitable,” the IPO underwriters violated NASD rules
governing accounts of customer purchases in initial public offerings, according
to the complaint.

Although little comfort, Vonage rival Skype also found itself the
target of a patent-infringement lawsuit.

According to published reports, Net2Phone, which is owned by IDT Corp., sued Skype and named eBay, Skype’s parent, as a defendant.

“We’ve not yet been served, so we can’t comment on the lawsuit,” a
Skype spokesperson said. EBay and Net2Phone did not respond to
requests for comment.

Net2Phone customers include cable companies offering Internet
phone service.

In the lawsuit, filed in the U.S. District Court of Newark, N.J.,
Net2Phone requests an injunction stopping what in court documents it
believes could be “irreparable harm.”

At the heart of the legal action is Skype’s use of point-to-point
technology enabling the VoIP service to connect devices and exchange
IP addresses.

In May, StreamCast Networks, owner of the Morpheus file-exchange
service, also sued Skype and others for patent infringement.

the Net2Phone suit, StreamCast asked for an injunction of Skype sales
and marketing.

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