Class Action Lawsuits

Homer Simpson once said of beer: "...the cause of and answer to all of life's problems." One could substitute "lawyers" for "beer" and the phrase would still ring true. Of course not all lawyers cause as many problems as they solve. Many are upstanding members of the community; professional, smart and ever-so-helpful when we need them. But there does exist in the litigation-ecosystem a certain breed of lawyers who often put their own interests ahead of both their clients and society in general; and they seem to congregate in the realms of personal injury and class-action.

Vonage is a Voice over Internet Protocol (VoIP) company that recently went public with much fanfare. The underwriters; Citigroup, Deutsche Bank and UBS put their collective heads together and determined that they should price 31.25mil shares at $17. Admittedly, pricing an IPO is tricky. One must factor in market sentiment, institutional, hedge fund and retail investor demand, the "hotness" of the sector at the time of the offering and a host of other components. Generally the syndicate of underwriters is responsible for allocating the entire deal to investors. This deal was unique in that Vonage gave its customers an opportunity to purchase IPO shares through the company rather than through the traditional method of indicating interest to one of the investment banks that is a member of the syndicate. In theory, it gives the loyal customer a chance to get in on the "ground floor" of a deal they'd otherwise have to buy in the open market at whatever price the IPO is trading--presumably higher than the issue price. In practice, Vonage traded as high as $17.25 for a brief moment on it's first day of trading, and has done nothing but head south since. Understandably, many of the Vonage customers who bought stock at the IPO price are upset that the stock is hovering around $12 these days.

Enter the class-action do-gooders. Motley Rice announced they were filing a lawsuit on behalf of the people who lost money on the IPO.

"We don't know yet exactly what happened in this IPO," Herb Teitelbaum, a partner in securities litigation practice group Bryan Cave, said Monday. "The fact that the stock dropped off 30 percent is not a violation."

He doesn't yet know what happened, but rest assured whatever it was, Vonage is going to pay for it. He'll see to that--and collect a handsome fee in the meantime.

If the underwriters would have done their job properly and there wasn't the amount of demand for the deal that they first thought, they could have taken a number of steps to ensure that the deal would not trade underwater right out of the gate. For example, they could have lowered the price of the IPO, scaled back the size of the deal, or postponed the deal until a later date when the market conditions were better. Their job (for which they are very well-compensated by the way) is to find the equilibrium point at which the company is happy with the proceeds raised from the IPO, and the institutions, hedge funds and small investors who bought the stock are happy with the price and the way it trades in the aftermarket.

Vonage did not set the price of the IPO, the underwriters set the price of the IPO. The market told the world that the price was too high. If anybody should be held responsible, it seems to me it should be the underwriters.

But wait a second, there's no guarantee that an IPO will trade higher right out of the gate. Markets can be brutal--it's proven time and time again everyday. Surely Vonage fulfilled their obligations per the SEC in fully disclosing to their customers the risks associated with the purchase of their IPO. A big dose of Caveat Emptor seems to be in order. Maybe they did somehow mislead their investors, who knows? I guess Motley Rice LLC will get to the bottom of it--for the good of the little guy of course.

Milberg Weiss Bershad & Schulman is another class-action law firm that specializes in securities fraud cases. Unfortunately for them, they are in the midst of some serious turmoil surrounding allegations that they paid illegal kickbacks to name plaintiffs and went through extraordinary lengths to cover it up.

All of this is not to say that there is no place in litigation for class-action lawsuits. They serve the public well in many cases. However, if somebody can point me to an area of litigation that is fraught with more fraud, exploitation and corporate blackmail--as has been exemplified in the billions of dollars wasted in asbestos and tobacco class-action litigation--please do.