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KAI RYSSDAL: VoIP. It sounds fancy. But really, it's just phone calls over the Internet.

Early on, there seemed be a clear industry leader, a company called Vonage. And Vonage had it all: Oddball commercials, catchy jingles and most important, lots and lots of customers.

Until the company went public last month. To say the stock tanked would be charitable. It was the worst IPO this year. So bad, in fact, that investors are suing and securities regulators are looking into it. Jim Granelli is a reporter for the Los Angeles Times.

JAMES GRANELLI: When a stock is being criticized before it even goes out as being priced too high, you can almost expect that the traders are going to beat it down. And the lawsuit that was filed recently by some of the customers points to that. It says basically there weren't enough institutional investors who wanted to buy this stock and that's why they sold some of it to the customers

RYSSDAL: Let's talk about that for a second. Part of the process of going public here was that Vonage was going to offer -- or in fact did offer -- share to its customers.

GRANELLI: That's right, about 14% of its stock was reserved for customers. You know, a lot of people who bought into this stock are pretty sophisticated investors. These are people who took a look at Vonage, saw a chance maybe to make some money if it went up right away and they were going to get out of it. So when you turn around and then you reserve a lot of shares for customers who might not be so sophisticated -- and I think that is a real concern whenever you sell to your own customers trying to attract small investors.

RYSSDAL: You look at Vonage and how it's done in the last week or whatever it is, you can't help but think of the dot com stocks.

GRANELLI: Well that's true, there are a number of reasons for that too. One is the fact that here is a company that's said, we want to grow revenue. They haven't made a cent, they have been loosing money all along, so when you look at the dot com bust that's what Wall Street talked about. They were throwing money at companies that were producing nothing but revenue and had really not much of a game plan to earn money.

RYSSDAL: Generally speaking, regulators frown on companies selling directly to customers, isn't that right?

GRANELLI: There's nothing wrong, there's nothing illegal about it of course. I think maybe they don't particularly care for it, especially here in southern California. You know only about 15 years ago now, there was a savings and loan called Lincoln Savings and Loan and Charlie Keating, who ran Lincoln Savings from the parent company called American Continental Company in Phoenix, sold a bunch of American Continental stock in an offering that went strictly to Lincoln customers. And it was sold in the Lincoln branches throughout Southern California.

Many elderly people didn't know what they were doing, lost their life savings. You know it's a very sad situation there, so when you have an offering going to specifically customers of the company that is going public or having a secondary offering, I think there is a real caution flag that's raised

RYSSDAL: James Granelli covers telecommunications for the Los Angeles Times. Mr. Granelli thanks for coming in.

GRANELLI: You're welcome.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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