BULLETIN: Vonage hit with class-action shareholder lawsuit

  Law firm Motley Rice LLC said this evening it has filed a class action lawsuit in the United States District Court for the District of New Jersey on behalf of purchasers of the common stock of Vonage Holdings Corp.
Written by Russell Shaw, Contributor

Law firm Motley Rice LLC said this evening it has filed a class action lawsuit in the United States District Court for the District of New Jersey on behalf of purchasers of the common stock of Vonage Holdings Corp.

The law firm issued a press release that accused Vonage of publishing a "false and misleading" Registrtion and Prospectus, an alleged infraction that has Motley Rice convinced that resulted in a 30 percent decline in the stock price since the stock went on sale, and the disillusionment of customers who were afforded he opportunity to purchase Vonage stock at $17 a share as part of the Directed Share Program.

Here's key specific language from Motley Rice's press release announcing the lawsuit:

The Complaint alleges the Company and certain named officers and underwriters violated the federal securities laws by publishing a materially false and misleading joint Registration Statement and Proxy-Prospectus (the "Prospectus"). The Company provides broadband telephone services in the United States, Canada, and the United Kingdom, primarily using voice over Internet protocol technology. Prior to the Company's Initial Public Offering ("IPO") on May 24, 2006, the Company had spent hundreds of millions of dollars to market its services to potential customers. However, the Complaint alleges, both the Company and Company insiders, who had invested hundreds of millions of dollars of their personal funds in the Company, were losing money. According to the Complaint, these Company insiders, desperate to execute an exit strategy for themselves, embarked on an illegal course of conduct to sell shares of the Company in a public market.

The Complaint further alleges that, Defendants, realizing that institutional investors who normally buy in IPOs would be reluctant at best to purchase Vonage shares as-priced, pre-sold at least 13.5% of the Company's IPO shares to Company customers in violation of NASD Rule 2310. NASD Rule 2310 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 also alleges Defendants had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability.

The Complaint also contends that the Underwriter Defendants violated the securities laws because they allowed this illegal and improper action to continue. The Underwriter Defendants, the Plaintiff claims, had an obligation to ensure that Vonage had complied with NASD Rule 2310 in setting up and administering the accounts of customers purchasing in the IPO. According to the Complaint, however, the Underwriter Defendants had little or no incentive to ensure that customer participants in the IPO were suitable. Instead, the Complaint also alleges they were motivated by the tens of millions of dollars in fees they would receive from a successful IPO. Furthermore, according to the Complaint, Vonage had agreed to indemnify the Underwriter Defendants against certain liabilities relating to the customer pre-sale program; among those liabilities was the foreseeable possibility that customers who purchased in the IPO would refuse or fail to pay for the common stock allocated to them in the pre-sale.

As a result of this alleged illegal conduct, shares of Vonage sold in the IPO declined more than 30% in the first seven trading days. The decline in value of these shares has been substantially exacerbated by many Vonage customers who participated in the pre-sale now refusing to pay for their shares.
The plaintiff seeks to recover damages on behalf of all persons who purchased or otherwise acquired VG stock and suffered a loss as a result. 

The controversy is starting to generate a bunch of contentious comments on the non-Vonage affiliated Vonage Forum. There's even a thread about this issue at http://www.vonage-forum.com/ftopic14492.html

The comments are all over the map.

BMoore writes: 

It was just a matter of time. I am just glad there will be some representation to help us through this mess.

I believed in this company to price their stock accordingly... the stock was to reward their loyal customers and unfortunately, they just upset 10,000 of their most loyal customers.

I hope this works out.

But jlridge counters:

Had the stock gone up, all these whiners would be shouting from the rooftops how much they made, and **** they weren't able to buy more.

I think many of the people who bought in were blinded by their greed. They saw big dollar signs and glossed over the multitude of warnings that there were no guarantees and significant risks.
Now the big dollar signs are coming from their accounts and they want to claim some conspiracy or fraud.

To those who are unhappy:

Go back and re-read the prospectus. You made a contract to buy shares at a fixed price. Now, you're threatening to to break that contract. Honor it, or you may be defending the indefensible in court.

 More to come...

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