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PostPosted: Thu Jun 01, 2006 5:12 pm    Post subject: Vonage E-Mail Error Could Force Company to Repurchase Shares Reply with quote Back to top

I just saw this from Bloomberg:

Time will tell if this materializes.

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PostPosted: Thu Jun 01, 2006 5:37 pm    Post subject: Re: Vonage E-Mail Error Could Force Company to Repurchase Sh Reply with quote Back to top

javablair wrote:
I just saw this from Bloomberg:

Time will tell if this materializes.


This is HUGE - this is the OUT....

I think it is getting more and more likely that we see a halt in the trading....
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PostPosted: Thu Jun 01, 2006 5:48 pm    Post subject: Vonage E-Mail Error Could Force Company to Repurchase Shares Reply with quote Back to top

June 1 (Bloomberg) -- Vonage Holdings Corp. customers who want to back out of last week's initial public offering by the Internet phone company may have a legal basis for doing so.

The Holmdel, New Jersey, company issued a statement yesterday demanding that customers who signed up for the IPO complete their purchases at the initial price of $17 a share. The statement follows a 32 percent decline in Vonage shares since the May 23 offering, the worst stock debut this year. The stock hit a new low of $11.52 today in New York composite trading.

Amid the clamor over whether customers will pay, Vonage has said little about notices that the company sent out prior to the IPO that may have violated federal securities laws. These technical errors, outlined on page 140 of the offering documents one day before the IPO, may give customers the right to force Vonage to buy back their shares, according to Vonage's own documents.

``One thing Vonage has to be considering is whether investors, if they are forced to pay, would have every incentive and motivation to go back over the details of how the IPO was conducted,'' said Donna Nagy, Charles Hartsock Professor of law at the University of Cincinnati College of Law. ``If they could show the law was violated, they could put the shares back to the company.''

Mitchell Slepian, a Vonage spokesman, declined to comment. The company first flagged the problem in a May 22 filing with the Securities and Exchange Commission, which also said that it would have ``meritorious defenses'' to any claims of defects in the IPO process, adding that the risks relating to potential legal actions ``are not significant.''

Stronger Warning

On May 23 Vonage amended the May 22 filing and strengthened its warning that it may have made technical errors in its IPO. Those errors, it said, may give customers buying shares the right ``to require us to repurchase their shares at the IPO price.''

Vonage sold 31.3 million shares at $17 each on May 23, raising about $531.3 million that the company planned to use in part to market its service. The shares fell 13 percent to $14.85 the next day, the worst debut for an IPO since China's Vimicro International Corp. dropped 16 percent after a November IPO.

The company planned to reserve 13.5 percent of the IPO for its telephone customers, 10,000 of whom committed to the purchase of 4.21 million shares for a total value of $72 million. The company in the May 23 SEC filing said it agreed to compensate the investment banks that underwrote the stock sale if any of these customers decided against purchasing the stock.

Customers May Renege

The filing fueled speculation that Vonage may allow customers to renege on their agreement to buy stock now that the shares are trading for less than $12 each, sparking a flurry of comments on Web logs from some customers. The company sought to end that speculation through the statement released yesterday.

``To be clear, we have not offered and are not offering to repurchase any of the shares of common stock from our customers,'' Vonage said in the statement.

Doug Morris, spokesman at UBS AG, one of the underwriters for the stock sale, declined to comment.

After announcing in early May that it would reserve shares for Vonage customers, the company sent out an e-mail about the program that lacked an active link to a prospectus for the IPO, according to the May 22 SEC filing. The first page of a Website on the customer stock program -- -- also didn't have a link to the IPO disclosure documents.

`Illegal Offer'

``As a result, it is possible that the e-mail communication and the first page of the website could be determined to be an illegal offer in violation of Section 5 of the Securities Act,'' of 1933, Vonage said in the May 23 filing. ``Recipients could seek to recover damages or seek to require us to repurchase their shares at the IPO price.''

Securities rules bar companies from offering securities without providing investors a prospectus, according to Stephen Sonne, a partner at the law firm of O'Melveny & Myers LLP who handles many IPOs. Companies are allowed to send out limited notices on a stock sale without a prospectus as long as the communications tell investors where to get the documents, he said.


Companies that make technical mistakes in preparing for initial public offerings -- one example was Internet search engine Google Inc. -- will sometimes notify investors that they may have the right to rescind their purchases, a step that requires the company to buy back the shares at cost. Investors rarely exercise such rights because under most circumstances the IPO shares they purchased have increased in value since the stock sale.

``This stuff happens with some frequency, but it normally happens in an up market when nobody gives a darn,'' said Edward Fleischman, a former SEC commissioner who is now senior counsel at the law firm Linklaters. ``This one happened to hit an offering where the price went off.''

Vonage said in the SEC filing that the Web site for the customer share program required potential investors to open an electronic copy of the prospectus before making an offer to purchase shares. ``It is, therefore, impossible for someone to place an order'' for the IPO shares without receiving the required documents, Vonage said in the filing.

According to Fleischman, investors can tell the underwriters they don't want to follow through with promises to purchase shares in the Vonage IPO, citing the possible violations disclosed in the offering documents. Should the underwriters insist on payment, investors can then sue. Another alternative is for the company and the underwriters to cancel all trades in Vonage stock and redo the IPO.

Share Drop

Shares of Vonage have dropped in five of its six trading days, extending the decline today by 39 cents to $11.63 in New York Stock Exchange composite trading. The market value dropped to $1.82 billion from $2.6 billion at the IPO.

Vonage has been increasing marketing expenditures to fend off competition for new customers, leading to net losses of $261 million last year and $85.2 million for this year's first quarter. The spat with existing customers over company shares could set back such efforts.

``The goal was to reward customers and drive loyalty and it appears to be in some cases having the opposite effect,'' said Richard Greenfield, an analyst at Pali Capital in New York. He rates the shares ``sell'' and doesn't own any.
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