An Atlanta, Georgia-based law firm Motley Rice LLC said it filed the class-action suit on behalf of everyone who bought common stock in Vonage and suffered a loss as a result.
The suit alleges that Vonage, its officers and underwriters violated federal securities laws by publishing a materially false and misleading prospectus.
Vonage’s IPO on May 24 has so far yielded only losses for its shareholders, with shares losing more than 30% of their $17 value since then. Following news of the suit, the stock inched up almost 3% on the New York Stock Exchange to close at $12.32. But in after-hours trading, the price slipped by four cents.
Vonage is the largest pure-play VoIP vendor in the US, but is a money-losing venture, mostly because of its massive marketing budget. The lawsuit alleges that some Vonage investors, who had invested hundreds of millions of their own dollars, were also 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, said a Motley Rice statement.
The complaint also alleges that Vonage’s unusual directed-share program, in which Vonage pre-sold at least 13.5% of its 31.25 million IPO shares to some 10,000 Vonage customers prior to the float, was illegal.
Vonage marketed the program as a reward to its loyal customers, who would have the chance to buy shares at the $17 list price. Had the shares risen in value after the IPO, this would, of course, have been a sweet deal.
Specifically, the lawsuit claims this pre-IPO share sale violated NASD Rule 2310, which requires that a company recommending the purchase of its shares to a customer must have a reasonable basis for believing that the recommendation is suitable for the customer.
The lawsuit alleges Vonage and its associated had no such reasonable basis and improperly crammed investors into the Vonage IPO regardless of their suitability.
Motley Rice’s statement also said Vonage and IPO underwriters pre-sold these shares realizing that institutional investors who normally buy in IPOs would be reluctant at best to purchase Vonage shares as-priced.
Online message boards showed some Vonage customer-investors, disgruntled with the poor performance of their shares, were planning to refuse to pay for their pre-IPO shares and dump Vonage as their VoIP provider.
Vonage said in its pre-IPO filings with the US Securities and Exchange Commission that it would buy back un-paid shares from its underwriters, in case its customers reneged on the deal.
But, despite its claims of being in a post-IPO quiet period, Vonage has since issued a statement saying it would chase up its customers who had agreed to buy shares at the $17 list price, but did not pay.
The lawsuit also implicates the underwriters of Vonage’s IPO because they allowed this illegal and improper action to continue, according to a Motley Rice statement.
Underwriters Deutsche Bank, Citigroup and UBS had an obligation to ensure Vonage complied with Securities rules in offering their customers pre-IPO shares, Motley Rice said.
According to the complaint, however, the underwriter defendants had little or no incentive to ensure that customer participants in the IPO were suitable, Motley Rice said.
Instead, the complaint also alleges they were motivated by the tens of millions of dollars in fees they would receive from a successful IPO.
The lawsuit also points to Vonage indemnifying its underwriters against the possibility of customers out of the deal by not paying for their shares.
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, Motley Rice said.
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.
Vonage also faces potential lawsuits and scrutiny by the SEC for botching up its pre-IPO share program for customers by not providing adequate links to its prospectus and contact details from whom the prospectus could be obtained.
Holmdel, New Jersey-based Vonage acknowledged in an SEC filing the day before its IPO that these technical glitches leave it open to litigation. Vonage said it might be liable to buy back the shares it sold to its customers under its pre-IPO share program at the $17 list price.
Based on the maximum allocation of such stock and the highly unlikely event that every single preferred-share owner demanded and won their money back, Vonage may have to pay roughly $78m.
The company deflected this potential risk, in its May 23 filing with the SEC, and said it would have meritorious defenses to any legal claims based on the technical glitches.
