June 9, 2006 10:39 AM PDT

Short selling implicated in poor-performing Vonage IPO

The New York Stock Exchange is looking into how short sellers may have contributed to the sharp decline of Vonage's stock after it debuted two weeks ago.

Regulators from the NYSE sent a letter to Wall Street securities firms on Thursday asking how dealers may have facilitated the short sellers' trades, according to a story published Friday by The Wall Street Journal.

Short sellers make money by betting a stock will decline in value. They borrow shares of the stock and sell it. Then they buy back the stock at a lower price hoping to make a profit. Because short sellers can drive down the price of a stock, they are often blamed when share prices decline rapidly.

In recent years, the U.S. Securities and Exchange Commission has adopted stricter rules for short sellers, tightening regulations around what is known as "naked" short selling, which refers to the practice of selling shares that have not yet been borrowed.

According to the Journal report, the letters sent to dealers questioned whether these rules had been broken in the case of the Vonage stock.

Officials at the NYSE could not comment on the Journal article, and Vonage representatives did not return phone calls.

Vonage, the Internet company that turns broadband connections into phone lines, debuted on the NYSE on May 24 at $17 per share. In a little over a week, the stock had lost about 30 percent of its value. Critics have come out of the woodwork questioning the price set for the initial public offering, given that the market was already in decline, and that Vonage had taken the unusual step of offering about 13.5 percent of its IPO shares to its customers.

Some of Vonage's shareholders have threatened not to pay for the shares they were allocated. And now, some disgruntled investors armed with lawyers have filed class action lawsuits against the company.

See more CNET content tagged:
short-seller, Vonage Holdings Corp., New York Stock Exchange, IPO, dealer

3 comments

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Who are these idiots?
Who are these idiots that think that investments are guaranteed money?!?! It's not. Just because you get in on an IPO doesn't mean you're going to automatically make money. You're subject to the whim of the market. Any idiot can look at the climate of the market and see it was bearish. To be surprise that a stock went down is just idiot. The purpose of the IPO is to generate cash for the COMPANY, not the investor. Of course the investor is making a BET that the price will go up but by no means is that a guarantee! I don't feel sorry for anyone. I actually did put a bid in and was rejected. In retrospect, I'm glad I was. I was the lucky one..
Posted by frankz00 (196 comments )
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probably because...
...a number of the investors were 'pigs' expecting to make a fast buck on the investiment that was made. Needless to say they were slaughtered.
Posted by mbjr (64 comments )
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palm - samething
stock markets still need to be cleaned up.. from the top->down

"market makers".. large brokage houses... index mutual funds... penny stock spam.. offshore boat racing... complex 401ks...

what a waste of human talent and earthly resources.. not to mention what this looks like in the context of the American Judicial system and 911
Posted by freq (121 comments )
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