I wrote about this impending doom in February. Vonage was never ready, nor did it have a good model to get profitable. On with the lawyers. Can't say I didn't warn you.
Vonage IPO Woes Continue
By Ed Sutherland
June 5, 2006
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 (Quote, Chart) 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 internetnews.com.
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.
Like the Net2Phone suit, StreamCast asked for an injunction of Skype sales and marketing.