Vonage Has Customer Quandary

Users are up in arms about the botched IPO allocation.
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Updated from 2:30 p.m.

Last week's selloff taught one

Vonage

(VG) - Get Report

customer a lesson she won't soon forget.

Nina Shreiber, a novice investor who has been a Vonage customer since 2004, tried to buy shares in the Holmdel, N.J.-based company's initial public offering. Vonage, saying much of its success has been "attributable to our customers," earlier this month allocated 15% of the IPO to users.

"It saved me a lot of money and I thought it was a cool service," says Shreiber, a 29-year-old New York talent manager, in an interview.

Vonage looked cool to any number of people leading up to last Wednesday's $531 million IPO. But when Shreiber tried to buy IPO shares, she first was told her purchase didn't go through. Then, after the stock plunged more than 12% on its first day, she learned that she did get some stock -- which by now was more than $2 below its offering price.

Now Shreiber, like many other small investors in Vonage, is wondering what to do. And the company, which sought to garner support for its stock by allotting shares to customers, faces brickbats from users who say the allocation process didn't work.

In response to complaints like Shreiber's, the company said in a statement to

CNBC

Tuesday that it would make whole customers who bought the IPO. But the statement didn't make clear what the terms of any offer might be or how many buyers might be involved, and Vonage didn't respond to requests for additional information.

Earlier this month, Shreiber says she requested 5,000 Vonage shares, the most she could get.

On the evening of May 23, when the IPO was priced, Shreiber says the Vonage IPO Web site reported that her purchase never went through.

"In big, huge, bold letters it said I was allocated zero, and that I owed zero dollars," says Shreiber in an interview.

The next day, though, Shreiber was surfing the Internet again and decided to take another peek at the IPO site. She was stunned to find out that the site now said she had been awarded 1,300 shares -- and owed $22,100.

By then, Vonage shares had cratered more than 13% in the worst IPO debut since 2004. Now, Shreiber is working with her broker to get out of the transaction.

"In my mind, I don't own this stock," Shreiber says.

A similar account is offered by Vonage customer David McFeeters-Krone. He says he didn't realize he had acquired shares until a statement came in the mail that he almost threw out in the trash.

"Anyway, I thought it was lame that their system screwed up and I probably held my shares a day or two longer than I would have otherwise, but hey I obligated myself to this process,'' he writes in an email.

Others say they had a difficult time selling them.

"After the stock tanked, it took me hours to find out how to sell my shares,'' writes Vonage customer Bob Moriarty in an email. "I'm still trying to find out how to get my cash out of the account.''

Vonage's efforts to reward its customers in the IPO appears to have backfired. The shares have tanked, and given Wall Street's dim view of the company's prospects, many analysts are not expecting them to rebound any time soon.

In an odd twist, Vonage said Tuesday that certain customers who agreed to buy shares won't be on the hook, according to a statement Vonage made to

CNBC

. The company will buy shares directly from the underwriters if necessary, according to the financial news channel. It's unclear if Vonage's offer would apply to customers like Shreiber, who didn't realize until after the stock began trading that they owned it. Vonage didn't respond to requests for comment about the IPO.

Shreiber is hardly alone in her complaints about the IPO. The message board

Vonage Forum is filled with complaints from disgruntled Vonage customers who tried to buy the shares. Shares of Vonage would have fared much worse were it not for the support the shares had gotten from retail investors, analysts have said.

Meanwhile, the company seems to be having its issues on the public relations front. Vonage said Monday that Chief Financial Officer John Rego would appear on CNBC's "Squawk Box" program Tuesday, but this morning the company issued a statement indicating he wouldn't appear. The company later said it changed its mind because of concerns about violating the so-called IPO quiet period.

Customer service also has been a problem for Vonage. The company's churn rate, measuring monthly defections, rose in the first quarter because of customer service problems that the company says are being fixed.

Plus, some broadband customers of

Time Warner's

(TWX)

AOL service can't even use Vonage.

Bucking the prevailing sentiment is analyst Albert Lin of American Technology Research, who Tuesday initiated coverage of Vonage with a buy rating and a $20 price target.

"The bear thesis of intense competition will prove to be overly simplistic and wrong in timing, fundamental attributes, and sentiment," he writes in a note to clients. "A customer base collapse for any reason seems remote for at least six to 12 months."