Yesterday we provided a quick summary of the Vonage complaint, together with a downloadable pdf of the entire complaint. Today we learn from Business Week’s columnist Tim Mullaney that at least part of the complaint was based on a typo!

In federal court filings, plaintiff’s firm Motley Rice LLC claimed underwriters led by Citigroup took 17% of the $531 million deal as fees — more than double the usual 7%. The charge was so shocking Motley Rice made it in bold italics: “Investors were willing to and did pay these large underwriting fees…because investors believed that such fees were being paid, in substantial part, to assure that the underwriters had conducted a thorough analysis of the transaction..
Invited to to explain their math, though, Motley Rice ‘fessed up to its own due-diligence slip: The charge was a typo. Underwriters were actually paid a little over 7%. Motley Rice insisted the goof won’t affect the case. “The whole gist is that the IPO was bungled,“ lawyer James E. Evangelista tried to explain. Oh sure.

Now, to be fair, the premium for due-diligence was a pretty small part of the complaint. But you can bet there’s some associate down in South Carolina, where Motley Rice is based, putting together a resume right now.

Vonage Plaintiffs: They Don’t Teach Spell-Check in Law School [BusinessWeekOnline.Com]

A friend of DealBreaker has reminded us that Jeffrey Citron, the former CEO of Vonage and a major shareholder, bought the house of Robert Brennan, the fallen financier whose bankruptcy case was brought to a conclusion in March after more than a decade in the courts. Citron bulldozed the property on Linden Lane in Monmouth County, New Jersey and built a $3 million mansion on the grounds. The Coast Star describes the house as a “majestic home on Linden Lane overlooking the Manasquan River.”
Next time maybe they should try salting the ground or hiring an exorcist to rid the property of the poltergeist of financial scandal.
Jeffrey & Suzanne Citron lay the foundation so that others can build a better future [The Coast Star]

DealBreaker has obtained a copy of the complaint against Vonage. The complaint accuses Vonage, its directors and its underwriters of violating securities laws and improperly selling shares to customers. “
The lawsuit claims that the sale of shares to customers in the IPO violated NASD rules requiring issuers to consider whether purchasing the shares is appropriate given the customers financial status and investment objectives. The complaint describes this violation as part of a scheme by the owners of Vonage “desperate to execute an exit strategy for themselves.” A lack of institutional interest in Vonage stocks forced the owners of Vonage to seek out less sophisticated investors–namely, the customers, according to the complaint. It also alleges that the Vonage underwriters failed to undertake a proper due diligence investigation of the company.
Keep in mind that making these kind of allegations is what class action lawyers do. But just because cows chew cud doesn’t mean that cud wasn’t grass before they swallowed it for the first time. Or something. We’ve never been good at making up those homey-sounding, Dan Rather analogies.
Click here to read the whole thing

Vonage and its underwriters anticipated that some customers might not pay for the shares they agreed to buy in the IPO, the Wall Street Journal reported yesterday. Registration documents filed with the SEC make clear that nonpayment was anticipated, and that Vonage agreed to purchase the shares.

The plan was spelled out in Vonage’s registration documents filed with Securities and Exchange Commission before the IPO and before customers started having second thoughts about their agreements to buy shares.
Generally underwriters are on the hook if investors who commit to buying IPO shares change their minds after the stock tumbles. But Vonage, one of the largest Internet phone companies, indemnified its underwriters — led by Deutsche Bank AG, Citigroup Inc. and UBS AG — for the portion of its issue its customers agreed to buy, according to the prospectus.

That makes sense. Usually, the risk of non-payment rests with the underwriters since they are responsible for finding and vouching for the buyers. Here Vonage was finding the customer-buyers and these individuals represented a greater risk of non-payment than the typical deep-pocketed institutional purchaser of shares in an IPO.
So is Vonage going to make good on threats to sue its customers to recover money it owes its underwriters?

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So now Vonage is “demanding” that customers who agreed to buy shares in last week’s IPO pay up for the shares. “Demand” is such powerful word. “Demand and two-bucks will get you a subway ride.
Hold on. We’re getting ahead of ourselves. Flashback a couple of days.
As the world shuffled back into focus on Tuesday morning and haze of beer and nitrate-loaded Memorial Day hotdogs began to clear, we were hearing word that Vonage was thinking of unscrewing customers who bought shares in last week’s IPO and balked at paying for the shares as the price slid in the days that followed. Clearly Vonage was in a tough spot. It’s underwriters wouldn’t stand for being left holding the bag for shares ordered but never paid for, but Vonage also didn’t want the underwriters (or Vonage itself) to start suing Vonage customers. The trial system is not exactly the best way of building a loyal customer base.
Vonage’s creative solution was reportedly a plan to reimburse the underwriters for shares not paid for by customers.
What happened next after the jump.

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On a day when telecom stocks generally went up, Vonage managed to drop more than ten percent. Nyquist Capital is predicting that the class action lawyers are probably already preparing lawsuits.

I’ll be the first to call it – the class-action attorneys are going to try and monetize the Vonage customer class of shareholders that took 13.5% of this deal. Vonage used tactics of a bucket-shop, pitching yours truly by email, voicemail, and snail mail. Fair? No. Reality? Yes.

Seeking Alpha has a round up of other reactions to the Vonage slide.
Telecoms mostly gain, but not Vonage
Vonage – Lipstick on a Pig [Nyquist Capital]

Andy Kessler writes in, joining the Vonage-bashing fray, and explaining the full extent of the screwed-ness:

When you use retail to price a deal, you are always asking for trouble. The syndicate dude at Citigroup lost the poker game–he stupidly tried to signal that the deal was over-subscribed, but only raised the number of shares, not the price. then pricing it at the midpoint of $16-18 at $17 was another signal of weakness. Breaking price is bad form, but breaking that $16-18 range in the first hour is even worse, every Tom Dick and Scary retail investor is now unloading their 1300 shares. also looks like the specialist at the NYSE stepped away. U-G-L-Y
it may still trade up. there are always tricks, like Citigroup buying in, but no way to really know another case of Wall Street Buffoonery. Citigroup smelled the 7% IPO fees on $500 million, but may lose that much keeping this stock above $15.

(The above left graphic, in case you’re wondering, is “screwed on crack.”) Speaking of Scary Retail Investor, see below: the email that went out to the “Vonage Customer Directed Share Program” about the IPO. And from now on, we’re going to refer to questionable friends-and-family rounds as “customer directed share programs.”

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