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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, September 22, 2009

FINRA Fines Underwriters for Miscommunications to Customers in Vonage IPO

FINRA fined Citigroup Global Markets, UBS Securities and Deutsche Bank Securities a total of $425,000 — and ordered the firms to make payments to customers that could total $420,000 — in connection with the firms' failure to adequately supervise communications with their customers in the initial public offering (IPO) of Vonage, LLC in May 2006.

 FINRA found that each of the firms failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of securities in the Vonage IPO. Each of the firms was a lead underwriter for the Vonage IPO, which included a directed share program (DSP) under which the firms sold approximately 4.2 million shares to Vonage customers through accounts the customers had opened at the firms.  FINRA found that because of the firms' supervisory failures, when a problem occurred at the outside company that caused numerous customers to receive incorrect communications, the firms were unable to respond satisfactorily.

As a consequence of the firms' failures, when an error by an employee of the outside company resulted in certain customers receiving communications stating that they had not received IPO allocations when in fact they had, the firms were unable to take prompt and effective action to respond to the problem. By the time some customers learned several days later that they had been allocated shares, the price of Vonage stock had declined significantly from the initial IPO price. Nevertheless, those customers were required to pay the higher IPO price for their shares and incurred losses when they later sold those shares.

 The restitution payments that FINRA ordered will compensate the customers for the difference between the $17 per share IPO price they paid and the lower price of Vonage stock at the time they learned that they had been allocated shares. Pursuant to the terms of the settlement, the firms will notify eligible customers.

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