The black cloud continues to hang over Internet telephone provider Vonage. In the midst of complaints about its 911 emergency access and a disastrous Wall Street debut, Vonage now faces a class action lawsuit accusing it of violating securities laws and improperly selling shares to customers.
The suit charges that Vonage's plan to allow its customers to purchase stock in last month's Initial Public Offering, was against the law.
The plan subsequently backfired, when Vonage stock opened for trading at $17 and promptly plunged to $12. Most customers who committed to buying shares at $17 balked when it came time to write the check.
On May 23, Vonage filed an amended statement with the Securities and Exchange Commission, raising the possibility it might have committed technical errors in the handling of the IPO. Specifically, it warned that the errors might require Vonage to repurchase shares purchased by customers at the IPO price.
The lawsuit, filed by some existing shareholders, claims Vonage tried to engineer the illegal stock sales to its customers because it knew there would not be enough institutional demand for its shares.
The complaint further alleges that Vonage realized that institutional investors who normally buy IPOs would be reluctant at best to purchase Vonage shares as priced and therefore pre-sold at least 13.5 percent of the company's IPO shares to Vonage customers in violation of securities rules.
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 Vonage executives had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability.
