Vonage Holdings Corporation ("Vonage" or the Company) provides broadband telephone services in the United States, Canada, and the United Kingdom, primarily using voice over Internet protocol technology.
The Complaint alleges that Vonage and certain named officers and underwriters violated the federal securities laws by publishing a materially false and misleading joint Registration Statement and Proxy-Prospectus (the "Prospectus"). Prior to the Company's Initial Public Offering ("IPO") on May 24, 2006, the Company had spent hundreds of millions of dollars to market its services to potential customers. However, the Complaint alleges, 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 the Complaint, these Company insiders, desperate to execute an exit strategy for themselves, embarked on an illegal course of conduct to sell shares of the Company in a public market.
The Complaint further alleges that Defendants, realizing that institutional investors who normally buy in IPOs would be reluctant at best to purchase Vonage shares as-priced, pre-sold at least 13.5% of the Company's IPO shares to Vonage customers in violation of NASD Rule 2310. 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 Defendants had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability.
The Complaint also contends that the Underwriter Defendants violated the securities laws because they allowed this illegal and improper action to continue. The Underwriter Defendants, the Plaintiff claims, had an obligation to ensure that Vonage had complied with NASD Rule 2310 in setting up and administering the accounts of customers purchasing in the IPO. According to the Complaint, however, the Underwriter Defendants had little or no incentive to ensure that customer participants in the IPO were suitable. Instead, the Complaint also alleges they were motivated by the tens of millions of dollars in fees they would receive from a successful IPO. Furthermore, according to the Complaint, Vonage had agreed to indemnify the Underwriter Defendants against certain liabilities relating to the customer pre-sale program; among those liabilities was the foreseeable possibility that customers who purchased in the IPO would refuse or fail to pay for the common stock allocated to them in the pre-sale.
As a result of this alleged illegal conduct, shares of Vonage sold in the IPO declined more than 30% in the first seven trading days. The decline in value of these shares has been substantially exacerbated by many Vonage customers who participated in the pre-sale now refusing to pay for their shares.
According to the Company’s Form 10-Q for the Quarterly Period Ended September 30, 2006, during June 2006 and July 2006, Vonage, several of its officers and directors, and the firms who served as the underwriters in Vonage’s IPO were named as Defendants in Lang v. Vonage Holdings Corp. et al., a purported class action lawsuit filed in the United States District Court for the District of New Jersey. Subsequently, several similar purported class action lawsuits were filed in the United States District Court for the District of New Jersey, one was filed in the United States District Court for the Southern District of New York and another was filed in the Supreme Court of the State of New York and subsequently removed to the United States District Court for the Eastern District of New York. The Complaints assert claims under the federal securities laws on behalf of a professed class consisting of all those who were allegedly damaged as a result of acquiring the Company’s common stock in connection with its IPO. The Complaints allege, among other things, that the Company omitted and/or misstated certain facts concerning the IPO’s Customer Directed Share Program. Some Complaints also allege the IPO prospectus contained misrepresentations or omissions concerning certain of its products and/or the prior experience of some of its management. One Complaint (Inouye v. Vonage Holdings Corp. et al.), which was filed in the United States District Court for the Southern District of New York and subsequently voluntarily dismissed, included an allegation of open market securities fraud during a purported class period of May 24, 2006 to June 19, 2006 in addition to claims arising out of the IPO. Although Lang, Inouye and one other Complaint were voluntarily dismissed, the Company expected the remaining Complaints to be consolidated at some time in the future.
According to a press release dated July 31, 2007, a federal judge in New Jersey agreed to consolidate 14 purported class action cases that accuse Vonage of making false statements with the U.S. Securities and Exchange Commission prior to its IPO. Judge Freda L. Wolfson of the U.S. District Court for the District of New Jersey granted shareholder Centurion Securities LLC's motion to consolidate the cases against the Internet phone company on July 26. In January, the Judicial Panel on Multidistrict Litigation centralized the cases for pretrial proceedings in the New Jersey court. Wolfson has yet to rule on Centurion's request to be appointed lead Plaintiff and to select Berger & Montague PC as lead Counsel.
Plaintiffs filed their first Consolidated Class Action Complaint on November 19, 2007. Defendants moved to have the case dismissed on April 2, 2008.
According to the Company’s Form 10-Q for the Quarterly Period Ended June 30, 2009, on April 6, 2009, the Court hearing the matter dismissed three claims with leave to amend two of them, and declined at such time to dismiss two of the other claims. On April 20, 2009, the Plaintiffs filed a motion asking the Court to reconsider the partial dismissal of their claims. On June 3, 2009, the Court granted-in-part and denied-in-part plaintiffs’ motion for reconsideration. On June 16, 2009, Vonage and Plaintiffs reached an agreement in principle to settle the litigation, which will include a release and dismissal of all stockholder claims against Vonage and its individual directors and officers who were named as Defendants. The settlement was subject to final documentation and Court approval. The settlement is funded by Vonage's liability insurance under the Company's directors and officers liability insurance policy.
The Settlement Hearing was held on December 4, 2009. That day, Judge Freda L. Wolfson approved the settlement and granted the motion for attorney fees. The civil case is now terminated.
On April 1, 2011 the Court issued an Order Approving Distribution of the Net Settlement Fund.
