A company such as Vonage deserves underwriters' deepest scrutiny. After all, its founder, Jeffrey Citron, was banned from the securities industry for life by the U.S. Securities and Exchange Commission for a previous venture. So one would have thought Citigroup, Deutsche Bank and UBS had crossed every "t" and dotted every "i" before bringing Vonage to market -- or even passed on the opportunity entirely.
Instead, the banks put their names to a badly priced and controversially handled float. With Vonage's stock down nearly 30%, shareholders are boiling with anger and the first in what could be a slew of class-action lawsuits against both the underwriters and the company have started flying. But it is hard to feel sorry for the banking trio.
First, look at Vonage's decision to sell 13.5% of the stock offered in the initial public offering directly to its customers. The banks gave their OK to this unusual request -- something the class-action lawyers say violated securities laws on the grounds that the banks didn't properly vet customers to see if they were financially suited for buying Vonage stock.
Then there is the prospectus itself. It omitted what angry shareholders allege were important facts in the biography of Vonage's chief executive, Mike Snyder. While it mentioned that Mr. Snyder was president of Tyco's ADT alarm unit from 1997 to 2006, it didn't say that Tyco restated its results from 1998 to 2002 by $1.4 billion or that Tyco had said the principal source of the accounting errors was ADT.
These issues might have mattered less if the float hadn't been priced at such a high level. But the program of inviting financially unsophisticated customers into the float had the effect of boosting the flotation price. As the marginal buyers, individual investors set an unrealistic price. The underwriters should arguably have persuaded Vonage to leave money on the table.
The banks obviously would prefer to chalk up the episode as experience. And, of course, there is some consolation in the hefty fees they reaped. But that is peanuts compared with the headache of fighting lawsuits and the potential damage to the banks' reputations.
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