Vonage interim CEO faced SEC scrutiny in 2003

Citron paid $23M to settle securities fraud case

With the resignation announced today of CEO Michael F. Snyder, broadband telephone service provider Vonage Holdings Corp. is putting its future back into the hands of Jeffrey A. Citron, who headed the company from 2001 until last year. Citron was introduced today as the embattled company's interim CEO.

Citron, who dropped the CEO title when Snyder arrived in February 2006, continued in the role of chairman and as Vonage's chief strategist.

At one period in his professional background, however, Citron raised some eyebrows.

Two years after joining Vonage as CEO and chairman in 2001, Citron agreed to a $22.5 million settlement with the U.S. Securities and Exchange Commission in connection with a securities fraud investigation dating back to 1993 -- before Citron joined the Holmdel, N.J.-based company.

In the case, Citron was one of four individuals and one company charged with "participating in an extensive fraudulent scheme involving the Nasdaq Stock Market's Small Order Execution System from 1993 to June 2001," according to the settlement.

Citron and the other defendants were charged with securities fraud and violations of the SEC's broker-dealer books and records and reporting provisions, according to the settlement.

Before joining Vonage, Citron in 1995 founded The Island, an electronic communications network used to automate stock market order execution processes. In February 1998, he became the chairman and CEO of Datek Online Holdings Corp. He was with both companies until October 1999, according to his Vonage biography.

The SEC settlement said Citron and the other defendants "devised and orchestrated the unlawful SOES trading scheme" at the former Datek Securities Corp. from 1993 to March 1998.

As part of his settlement with the government, Citron did not admit to or deny the SEC's charges.

Yet despite that earlier brush with the SEC, Citron will likely have more trouble turning Vonage's stalled business around than gaining the support of any wary customers or investors, said Umesh Ramakrishnan, global head of the technology practice of executive search firm Christian & Timbers in New York.

"As long as people produce results, we seem to forgive their past transgressions," Ramakrishnan said. "Martha Stewart didn't just pay a fine. She did time, and now she's back in the limelight."

At worst, Citron's past SEC dealings will only "play in the minds of investors in the short term," he said.

"I think what is more of an issue is can he handle the challenge that he's got on his hands currently" in fixing the problems at Vonage, Ramakrishnan said.

Vonage is facing increased competition from large telecommunications companies that are offering their own bundled voice-over-IP services, while at the same time continuing to deal with a crushing court loss last month in a patent infringement lawsuit brought by one of its largest competitors, Verizon Communications Inc.

Vonage was ordered by a federal court to pay $58 million for infringing on three patents owned by Verizon. The eight-member federal jury also said Vonage must pay a 5.5% royalty to Verizon on Vonage sales going forward.

The first order of business for Citron has to be to ensure that the company quickly incorporates work-arounds to fix the patent infringement issues and allow Vonage to get back to its mission of growing its business, he said.

"The biggest thing that he needs to do right now is to find this technology work-around," Ramakrishnan said. "I think the entire core of Vonage's survival is going to balance on that timeline between its design and implementation. If this thing sits in [the] design [stage] for a long time, I think they have a major problem. It will be very difficult for Vonage to get out of it."

Citron's key strengths are as a visionary and as an entrepreneur, so he needs to surround himself with business-savvy executives who can run and manage the troubled company's operations, Ramakrishnan said. "That's why he brought [former CEO] Snyder in to begin with. He brought in Snyder so he could focus on strategy and vision."

Brooke Schulz, a spokeswoman for Vonage, today declined to comment on Citron's past SEC settlement. Citron was not available for comment, she said.

The legal fight with Verizon, however, is far from over, she said. "We still wholeheartedly believe that we did not infringe on their technology," Schulz said. "We're going to fight for our customers' right for affordable, great and reliable phone service. I believe we will be vindicated."

Patrick Monaghan, an analyst at The Yankee Group in Boston, said the company's move to bring in Citron to replace Snyder is "an effort for them to right the ship."

While the Verizon lawsuit has been difficult for Vonage, the bigger problems long term are the pending court injunction that threatens to bar Vonage from signing new customers and the negative publicity the court case generated, Monaghan said.

The company secured a temporary stay for the injunction, but Vonage will likely need to do whatever it needs to do to stay in business -- including paying a large settlement as Research In Motion did last year to end a similar patent infringement dispute, he said.

And though Citron had his earlier brush with the SEC while working elsewhere, his appointment as interim CEO was a good one, Monaghan said.

"I think if anybody's going to help Vonage out, it's going to be him," he said. "He fights hard and he can be a scrappy guy, so I think he's probably the right man for the job."

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