Investors Sue Vonage over IPO

A class action lawsuit was filed against Internet telephone provider Vonage, Inc. in an Atlanta Federal Court on Friday June 2, 2006. The suit, filed by the Atlanta-based law firm Motley Rice, was filed on behalf of shareholders who had purchased stock in Vonage prior to the Initial Public Offering, known in legal terms as an “IPO.” Among the allegations alleged in the suit, Vonage is accused in the shareholders’ suit of intentionally misleading investors regarding the value of the company. Vonage raised approximately $531 million in the public offering but its stock price has tumbled over 30% from its debut listing of $17 a share on May 24, 2006. While it is not uncommon for stock prices in highly touted IPO’s to fall after the first day of sales, market makers and the attorneys pursuing this litigation feel that the rapid decline in Vonage’s share value was directly related to the fact that Vonage has consistently lost money and has never been profitable; a fact that the market is unwilling to overlook. Additional counts filed against Vonage in the complaint allege that Vonage and its underwriters-- Deutsche Bank, Citgroup and UBS violated NASD Rule 2310, 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 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 states that the underwriters who should have been making sure the customers were suitable candidates for the stock did not fulfill their obligation. Vonage executives have declined comment on the allegations, other than to say that the company is under a legally mandated quiet period, which it is required to maintain after an IPO. Vonage is emerging as a leader in the field of VoIP (Voice over internet telephony) services and presently boasts 1.4 million subscribers, many of whom rely on Vonage as their primary home and/or business telephone service provider.

The following questions have been addressed in this article:

What was so Unique about the Vonage IPO that such Litigation Has Commenced?
How Have Vonage Shareholders Reacted to the Issues Raised in the Litigation?
What Sort of Penalties Could Vonage Face if they are Found Liable?

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