The plummet of VoIP service Vonage’s IPO has drawn a class action lawsuit from Atlanta-based law firm Motley Rice. It alleges the company and its underwriters violated federal securities laws by publishing a “false and misleading” prospectus.
Vonage issued its IPO on May 24th to a less than enthusiastic market that tanked shares in the company by nearly 30 percent in a week’s time. The stock debuted at $17 per share and is currently selling for $12.32.
Motley Rice accuses Vonage Holdings Corp. (NYSE: VG) of duping investors into bailing out company insiders, who had invested hundreds of millions of dollars of personal funds into a company that was losing money all along. Vonage pulled in over half a billion dollars from an offering the law firm calls an “exit strategy” for insiders.
The complaint makes a central question of the pre-selling of 13.5% of IPO shares to Vonage customers, who felt the brunt of the first week’s losses. The suit claims the company knew the stock was overpriced when it offered the early sale of shares to it customers:
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.
Adding to the suspicion is the company’s apparent back-to-back reneging of offers on CNBC’s “Squawk Box” television program. Vonage issued a statement on May 29th announcing that its chief financial officer, John S. Rego, would appear on the program to discuss the situation. A new statement was issued the following day saying he would not be appearing on the show.
In a May 31st report, the company released a statement to “Squawk Box” about the possibility of a buy-back:
“While all avenues are available to us, we cannot imagine alienating our customers in that way.” The company added that if some participants in the program did not pay, “we expect to repurchase the shares from the underwriters if necessary.”
That same day, Vonage changed its story:
Late Wednesday, the company released a statement saying customers are “obligated to purchase their share allocation from the underwriters.”
“To be clear, we have not offered and are not offering to repurchase any of the shares of common stock from our customers,” the statement said.
On June 2nd, Motley Rice announced that it had filed the lawsuit. The lawsuit further accuses the underwriters of ignoring “illegal and improper action “because of the substantial fees they could collect:
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.
The suit seeks damages on behalf of those who purchased or acquired Vonage stock and suffered a loss as a result.
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