Vonage shareholders sue over IPO

Internet phone provider Vonage is being sued in a class action lawsuit on behalf of shareholders who bought stock in the company prior to its initial public offering.

The suit filed on Friday in the US District Court for the District of New Jersey by the Atlanta-based law firm Motley Rice asserts that the internet telephony provider, its officers and the IPO's underwriters misled investors.

Vonage's stock, which debuted on the New York Stock Exchange on 24 May at $17 per share, has lost about 30 per cent of its value in its first seven days of trading. The complaint filed against Vonage claims the company's investors were motivated to push for an IPO because the company had been losing money, and the investors were desperate for an exit strategy. Vonage raised about $531m from the offering.

Vonage had taken the unusual step of offering about 13.5 per cent of its IPO shares to customers. The complaint alleges Vonage's officers decided to offer shares to customers because they knew institutional investors who normally buy IPOs would be reluctant to buy Vonage stock. Vonage has consistently lost money and has never been profitable.

Since the rapid decline of the stock, some of Vonage's shareholders have threatened not to pay for the shares they were allocated. But Vonage said last week through a statement that it will pursue payment from anyone who was allocated shares.

The suit further alleges Vonage and its underwriters - Deutsche Bank, Citgroup and UBS - violated a securities law which "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 law firm said in its statement.

The complaint asserts Vonage "had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability". It further says the underwriters who should have been making sure the customers were suitable candidates for the stock did not fulfil their obligation.

Vonage representatives were unavailable for comment.

Marguerite Reardon writes for CNET News.com