As many of Vonage customers are suspected to have reneged on commitments to buy stock, the company could be forced to indemnify its IPO underwriters and potentially cost Vonage $70 million -- in a worst-case scenario, that is.
On June 2006, lawyers filed an investor class action suit against Vonage Holdings Corporation in New Jersey district court. The problem become apparent when the news came out that many Vonage customers who bought stock reserved for them in a customer stock program may have defaulted on paying for the shares.
Vonage, which reserves 14 percent of its IPO shares for its customers, gave its clients three days to settle up after they agreed to purchase stocks -- at $17 opening price; but within that three-day period, Vonage's stock price slipped to $12 so Vonage would cover that $5 gap, less an underwriting fee.
Per Vonage accounts, the company sets aside 4.2 million shares for customers representing about 14 percent or $71.5 million of the $531 million IPO. Vonage is most likely to sell the stock into the market to recoup some of the loss.
At the center of the case is the reported loss of roughly $170 million investor capital. Plaintiff's lawyers are preparing a case against Vonage on the account of "making false and materially misleading statements in the registration statement and prospectus."
Some skeptical questions: Could it be that Vonage created the customer stock purchase program only to inflate the stock price? Was there ever a review of the customers' income statements and credit ratings to at least assess the individual customers "suitability" to buy stock?