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Internet phone service provider Vonage (NYSE:VG) is now at the center of a class action lawsuit that claims the company bamboozled customers toward investing in its Herculean $530 million IPO.

The company, which should've set off all types of red flags and alarms when it set aside 4.2 million IPO shares priced at $17 for customers, has been told by some customers that they'll renege on shares; Vonage says it'll get the money no matter what.

The suit, filed Friday in U.S. District Court in New Jersey, claims Vonage tried to compensate for a lack of interest among institutional traders who usually dominate IPOs by selling shares to consumers. The suit contends that Vonage and its underwriters violated a securities law that "requires that a company recommending the purchase or sale of its securities to a customer must have a reasonable basis for believing that the recommendation is suitable for the customer." Vonage, the statement charges, "had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability."

To some, this may come as a shock; to others, this may all seem uncanny, since the disastrous Vonage IPO echoes founder Jeff Citron's checkered history. Anyone who's read the Vonage prospectus will recall this telling passage:

The past background of our founder, Jeffrey A. Citron, may adversely affect our ability to enter into business relationships and may have other adverse effects on our business. Prior to joining Vonage, Mr. Citron was associated with Datek Securities Corporation and Datek Online Holdings Corp. During a portion of the time Mr. Citron was associated with Datek Securities, the SEC alleged that Datek Securities, Mr. Citron and other individuals participated in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of allegations against Mr. Citron and his past SEC and NASD settlements. We believe that some financial institutions and accounting firms have declined to enter into business relationships with us in the past, at least in part because of these matters. Other institutions and potential business associates may not be able to do business with us because of internal policies that restrict associations with individuals who have entered into SEC and NASD settlements. While we believe that these matters have not had a material impact on our business, they may have a greater impact on us when we become a public company....

It's hard to deny the appearance that the Vonage IPO was an excuse for Citron and his cronies to cash out on what was a deeply flawed company, one that couldn't be sold without the help of unwary investors and rapacious bankers out to capture that coveted 7% underwriting fee. Or as Jeremy Bentham might say, it was a bunch of "nonsense on stilts."

Source: Vonage IPO: Nonsense On Stilts (VG)