NYSE Investigates Short-Selling In Vonage IPO

by Carla Johnson, Investors Offshore.com

13 June 2006

The troubled Vonage IPO attracted more unwelcome attention last week when the NYSE wrote to securities firms asking them about possible involvement in short selling which may have accounted for the sharp fall in Vonage's share price since the float, reports the Wall Street Journal.

Vonage provides broadband telephone services in the United States, Canada, and the United Kingdom, primarily using voice over Internet protocol technology. The company raised US$530m in May in a listing which was well over-subscribed.

The letters apparently also asked for information about failures to deliver stock after the offering, and specifically enquired about trades by prime-brokerage customers, who are known to lend stock to hedge funds in short-selling manoeuvres.

The IPO was criticized in advance by many commentators, not least because Vonage, which is unprofitable to date, relied on its own customers for a significant part of its float. There was also criticism of corporate governance at the company. Some advisers openly recommended shorting the stock when it floated. This is not illegal as long as short trades are settled on time; but a significant number of Vonage trades have not settled, sometimes a sign of 'naked' short-selling, which is banned. The stock has fallen more than 30% since the IPO.

Separately, investors in the IPO have attacked the company and its underwriters in a class action lawsuit in the United States District Court for the District of New Jersey.

The complaint, filed by US law firm, Motley Rice LLC, alleges that the Company and certain named officers and underwriters violated the federal securities laws by publishing a materially false and misleading joint Registration Statement and Proxy-Prospectus.

Prior to its IPO in late May, the firm had spent hundreds of millions of dollars to market its services to potential customers. However, the complaint alleges that both the company and company insiders, who had invested hundreds of millions of dollars of their personal funds in the company, were losing money.

According to Motley Rice, these Vonage insiders were "desperate to execute an exit strategy for themselves", and embarked on an illegal course of conduct to sell shares of the company in a public market.

The complaint further alleges that the defendants, realizing that institutional investors who normally buy in IPOs would be reluctant to purchase Vonage shares as priced, pre-sold at least 13.5% of the company’s IPO shares to company customers in violation of NASD Rule 2310.

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 that the defendants had no such reasonable basis in this case and "improperly crammed investors into the Vonage IPO regardless of their suitability".

The action seeks to recover damages on behalf of all persons who purchased or otherwise acquired Vonage stock and suffered a loss as a result.

Recommended