Vonage Customers Irked as Stock Deal Hits a Snag
Firm Says It Won't Charge Buyers for Botched Trades

By Yuki Noguchi
Washington Post Staff Writer
Wednesday, May 31, 2006

Vonage Holdings Inc. hoped to show its Internet telephone customers how much it valued them by making many eligible to buy shares in the company's public offering last week. The idea backfired: Customers who lined up to buy those first public shares got burned, as the price of the stock has fallen 26 percent.

Now many are outraged, not only by the stock's poor performance but also by what they say were glitches in Vonage's unusual effort to include customers in its IPO.

Nina Shreiber, a talent manager in New York, was described in an article on TheStreet.com yesterday as trying to place an order for 5,000 shares but was told she qualified for none -- until shares started trading and she was told she owned 1,300, which she says she doesn't intend to pay for.

"I'm confident in my claim that I don't have any," Shreiber said in an interview. She added that she had no plans to cancel her Vonage phone service, but other customers on the company's online chat board were threatening yesterday to do just that. The stock they agreed to buy at an initial offering of $17 a share closed trading yesterday at $12.50.

Vonage officials declined to comment yesterday on frustrated investors not wanting to lay claim to ownership in the stock, citing a 25-day silent period. But in its S-1 filing with the Securities and Exchange Commission, Vonage said it would reimburse its underwriters for any customers who bailed out on paying for stock.

"We have agreed to indemnify the underwriters against certain liabilities, including those that may be caused by the failure of Directed Share Program participants to pay for and accept delivery of the common stock which had been allocated to them," the company said in its filing.

Before the public offering, Vonage notified customers via e-mail and voice mail that they might be eligible to buy shares if they met certain requirements, including that participants had to be customers from Dec. 15, 2005, through Feb. 1. In an amended SEC filing, Vonage conceded that its unusual method of marketing its IPO to customers "could be determined to be an illegal offer" in violation of securities law, but added that the company believes it would have "meritorious defenses" against any legal challenges.

A spokesperson for the SEC declined to comment yesterday on Vonage's handling of its IPO.

The company, which has more than 1.6 million subscribers to its monthly phone service, declined to say how many customers have backed away from paying for the shares they requested.

But online, a chorus of discontent grew starting last Wednesday, when the Holmdel, N.J.-based company's shares dropped immediately on its first day of trading.

"Even though [I] knew the risks, I still feel like I am being cheated on," an investor called "Silkworm" wrote yesterday on an investors' forum hosted on Vonage's Web site. The customer originally hoped to buy 600 shares but was only granted 200, and then said that because of technical errors was prevented from selling them when they hit $16.50 a share. "I never thought this could happen, but I am starting to feel like I should not be a Vonage customer any longer."

Vonage's commitment to foot the bill of nonpaying customers irked some other customers, who already paid for their shares and lost money in the market.

"So if you broke the rules [you're] rewarded with a $17 buyback while those that played by the rules are getting punished with a $12 stock and huge losses?" wrote an investor under the name "Gfoulks" on the Vonage message board.

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