Vonage Shareholders File Lawsuit Over IPO

The Internet phone company's stock price has fallen since its May 24 IPO. (By Adrian Brown -- Bloomberg News)

Shareholders of Vonage Holdings Corp. have filed a class-action lawsuit against the Internet telephone company, compounding the troubles stemming from Vonage's initial public offering last month.

The lawsuit, filed Friday in U.S. District Court in New Jersey on behalf of purchasers of Vonage's stock, alleges the company's executives violated securities laws by making "false and misleading" statements about the company's financial condition in its prospectus.

The public offering of the Holmdel, N.J.-based Vonage raised $531 million for the company when shares debuted May 24 at $17 each, but the stock closed yesterday at $12.32.

The stock's immediate decline irked some Vonage subscribers who signed up for a "directed share program" that allowed eligible Vonage customers to purchase up to 5,000 shares each at the opening. Ultimately, about 10,000 customers participated, buying 4.2 million shares.

Last week, some customers balked and said they would not pay for the shares. Vonage has said it would cover costs for its underwriters if customers back out of their purchase commitments but also insisted it was not offering to repurchase the shares from customers.

Vonage itself acknowledged in one of its regulatory filings that it might have violated securities law by not including a link to its prospectus on a Web site the company created to inform its customers about the stock-purchase plan. In the same filing, Vonage said it believed it had adequate defense against such a charge.

Vonage has not yet been served with the lawsuit and therefore cannot comment, said Chris Murray, vice president for regulatory affairs for Vonage, which has 1.6 million subscribers to its broadband phone service.

The law firm that brought the suit, Motley Rice LLC, did not return calls requesting comment.

Vonage is one of the best-known Internet phone services to compete with traditional land-line service. The company spends heavily on marketing to drive customer growth and has not yet generated a profit.

In its class-action lawsuit, Motley Rice said that such expenditures were hurting the company and that "company executives were desperate to execute an exit strategy" that would allow them to cash out their investments by foisting the ownership onto the public markets.

The suit accused Vonage of implementing the directed share program, which made up 13.5 percent of the public offering, as a way to boost appetite for Vonage shares.