If you think history doesn't repeat itself, look no further than the goofy, pre-IPO posturing at Vonage. The Internet phone company today released a statement saying:

"As you may know, Vonage has filed a registration statement with the Securities and Exchange Commission (SEC) related to its proposed initial public offering (IPO) of common stock. Because much of our success is attributable to our customers, we have asked the underwriters of the IPO to reserve shares of common stock for sale to certain Vonage customers at the IPO price in a Directed Share Program."

Awww. Isn't that sweet of them? If you were a customer between Dec. 15, 2005, and Feb. 1 of this year, you may be eligible to participate! IPO, baby! Money for nothing? We'll all hit the jackpot!

So, time to break out the checkbook?

Hang on just a second.

If this all sounds a little too 1999 to you, good. Take a closer look and you'll see that Vonage's money-burning operations are as bad as anything from the bad old dot-bomb days. Take a look for yourself.










Operating Income





Net Income





Free Cash Flow





*Data from Capital IQ.

Don't rub your eyes; what you see is correct. For the year ended Dec. 31, 2005, Vonage took in $269 million dollars and burned all of that, and more, to come up with a GAAP loss of $261 million.

Vonage's plan is to spend its way to ... what? Growth, I guess. Profitability? Yeah.

Let's be honest, when you're hawking a commodity like Internet telephony, there's not much else you can do but play the top-line game. After all, you've not only got to compete against free Internet-based services -- like eBay's (NASDAQ:EBAY) Skype, Google's (NASDAQ:GOOG) chat, other voice IM services from Yahoo! (NASDAQ:YHOO) and Time Warner's (NYSE:TWX) AOL -- you've got to compete with phone and cable providers who are moving onto the same turf, from Comcast (NASDAQ:CMCSA) to Verizon (NYSE:VZ) and just about anyone else. If there are profits out there, they are going to be thin.

Of course, the folks who control the networks, like Comcast and Verizon, might not go in for that whole "net neutrality" thing. If they instead create custom data pipes for their own VoIP systems, and relegate third-party and freeware services to the leftovers, it would make things even tougher for the Vonages of the world.

So, major competition. Major risk. Major rewards?

I wouldn't bet on that.

Remember, Fool, IPOs are not designed to let you in on the next big thing. (Ask yourself this: "If the business is so great, why would they want to share it with us?") Nope, IPOs happen, ostensibly, to let companies gain capital in order to execute their business plans. But just as often, they're a gravy train for investment bankers and a way for venture capitalists and insiders to cash out -- and you get to write them the check.

And in this case, you might want to take a deeper look at the primary beneficiary of that check, Jeffry A. Citron, the "Chief Strategist" who was, until February, the CEO. As the Vonage IPO filings explain it (page 118), Citron was among several employees at Datek who got into major troubles with the SEC.

"The SEC alleged that Mr. Citron and the other defendants accessed the SOES system to execute millions of unlawful proprietary trades, generating tens of millions of dollars in illegal profits. The complaint further alleged that these defendants hid their fraudulent use of the SOES system from regulators by allocating the trades to dozens of nominee accounts, creating fictitious books and records, and filing false reports with the SEC. To settle the charges, Mr. Maschler, Mr. Citron, and the other individuals paid $70 million in civil penalties and disgorgements of profits, of which Mr. Citron paid $22.5 million in civil penalties. These fines were among the largest fines ever collected by the SEC against individuals."

You still think these folks are doing you a favor?

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Seth Jayson is continually amazed at what's hidden in plain sight. At the time of publication, he had no positions in any company mentioned. View his stock holdings and Fool profile here . Fool rules are here.