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FCPA Blog Daily News

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Wednesday
Oct012014

SEC ends Dialogic probe that was based on successor liabilty

Milpitas, California-based Dialogic Inc. said in August that the SEC had ended an informal investigation of potential FCPA violations by a company Dialogic acquired in 2010 and won't take any enforcement action.

A few months before Dialogic acquired VOiP company Veraz Networks, Inc., Veraz 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 officials in China and Vietnam.

About six months after the acquisition, the SEC told Dialogic it was now the target of an informal FCPA investigation for possible offenses that had been committed by Veraz.

But in July this year, Dialogic received a notice from the SEC that the agency had concluded its investigation and, "based on information it had as of July 2, 2014, the SEC did not intend to recommend an enforcement action against [Dialogic]."

*     *     *

Under the American legal doctrine of successor liability, an acquiring company can become responsible for civil and criminal offenses committed by the acquired company before the acquisition happened.

The 2012 DOJ/SEC Guidance said:

Companies acquire a host of liabilities when they merge with or acquire another company, including those arising out of contracts, 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.

"Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception," the Guidance said.

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."

*     *     *

Dialogic said in August that its board had taken the remedial actions recommended by outside counsel and that the company had "updated and improved [its] compliance procedures."

Dialogic also said it had produced documents to the DOJ and SEC and had fully cooperated during the investigation.

The company didn't provide other information about the DOJ's role in the informal investigation or say if the DOJ might still bring an enforcement action.

*     *     *

Here's the FCPA disclosure from Dialogic's Form 10-Q filed with the SEC on August 14, 2014:

On March 28, 2011, we received a letter from the SEC informing us that the SEC was conducting an informal inquiry, or the SEC Informal Inquiry, and requesting that we preserve certain categories of records in connection with the SEC Informal Inquiry.

In a follow up discussion with the SEC on March 30, 2011, the SEC informed us that the inquiry related to allegations of improper revenue recognition and potential violations of the Foreign Corrupt Practices Act of 1977, as amended, by the former Veraz Networks Inc. business during periods prior to completion of our business combination with Dialogic Corporation.

Our Board of Directors, or the Board, appointed a committee to review these issues, with the aid of counsel, and to make recommendations to the Board as to what, if any, remedial actions would be appropriate. The committee engaged Sheppard Mullin Richter & Hampton LLP, or Sheppard Mullin, as outside counsel to the committee.

The Board has taken the remedial actions recommended by Sheppard Mullin and the committee and we have updated and improved our compliance procedures. In addition, we produced documents to the Department of Justice, or DOJ, relating to the SEC Informal Inquiry. We fully cooperated with the SEC and DOJ in connection with the SEC Informal Inquiry.

On July 2, 2014, we received a notice from the SEC under the guidelines set out in the final paragraph of Securities Act Release Number 5310 [pdf]. The notice advised us that the SEC had concluded its investigation and, based on information it had as of July 2, 2014, the SEC did not intend to recommend an enforcement action against us.

We incurred significant costs related to the SEC Informal Inquiry. Further, the SEC Informal Inquiry caused a diversion of management’s time and attention. We can provide no assurances that we will not become subject to other governmental investigations in the future, which may also cause us to incur significant costs and divert our management’s attention, any of which could have a material adverse effect on our financial condition and results of operations.

*     *     *

Our thanks to the FCPA Blog's volunteer researcher who produces the quarterly Corporate Investigations List (coming again soon), and who called our attention to Dialogic's latest FCPA disclosure about its SEC declination.

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Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.