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Successor liability hounds Dialogic

In June 2010, a California-based VOiP company called Veraz Networks, Inc. paid $300,000 to settle SEC charges that it violated the FCPA’s books and records and internal controls provisions by making illegal payments to foreign officials in China and Vietnam.

Veraz conducted a two-year internal investigation prior to its SEC settlement, and spent more than $2.5 million to investigate and handle the FCPA compliance issues.

A few months after its SEC settlement, Veraz was acquired by another public company called Dialogic Inc. (NASDQ: DLGC).

Did the SEC settlement settle things?

Not yet.

In March last year, the SEC told Dialogic it had opened an ‘informal inquiry’ about FCPA violations by . . . . .  you guessed it . . . . Veraz Networks.

The SEC said it wanted to look at events that occurred before Dialogic bought Veraz.

How’s that possible?

Successor liability, by which acquiring companies become responsible for civil and criminal offenses by the acquired company, before the acquisition happened.

The DOJ and SEC didn’t invent successor liability. But in the super-guidance released last week, they left no doubt that they’re all for it.

‘Companies acquire a host of liabilities when they merge with or acquire another company,’ the guidance said, ‘including those arising out ofcontracts, torts, regulations, and statutes. As a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities.’

The purpose of successor liability, the guidance said, is among other things to prevent companies from avoiding liability by reorganizing.

They continued: ‘Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception.’

So Dialogic may be on the hook.

The company said in its latest FCPA disclosure last week that it’s cooperating with the SEC, has taken remedial action to strengthen its compliance program, and is sharing information with the DOJ.

In the guidance, the DOJ and SEC said they’ve sometimes ‘declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with DOJ and SEC in the merger and acquisition context.’

In other cases, they said, they’ve acted because of ‘egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct from continuing after the acquisition.’

By that standard, Dialogic hasn’t disclosed facts that might support an enforcement action. The DOJ and SEC don’t comment on pending investigations.

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