updated 6/4/2006 9:26:03 PM ET 2006-06-05T01:26:03

Vonage Holdings Corp. is the target of a class action lawsuit that claims the Internet phone company improperly steered consumers toward investing in its $531 million initial public offering.

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Shares of the Internet phone startup have plunged more than 30 percent since the much-anticipated IPO May 24.

The company took the unusual step of setting aside 4.2 million IPO shares priced at $17 for customers. The stock closed at $11.98 Friday on the New York Stock Exchange.

Some customers have threatened not to pay for the shares; Vonage says it will pursue those funds.

The suit, filed Friday in U.S. District Court in New Jersey, claims Vonage tried to compensate for a lack of interest among sophisticated institutional investors who usually dominate IPOs by selling shares to consumers, according to a statement issued by the law firm Motley Rice LLC.

A Vonage spokesman said Sunday the Holmdel-based company had no comment on the lawsuit.

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," the law firm said.

Vonage, "had no such reasonable basis in this case and improperly crammed investors into the Vonage IPO regardless of their suitability."

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