Four Starkey defendants plead not guilty in $20M fraud case

Four of the five executives accused of stealing more than $20 million from Starkey Hearing Technologies pleaded not guilty to fraud charges Friday.

After the federal court hearing, attorneys for two of the men accused Starkey's majority owner, Bill Austin, of lying to authorities about the disputed transactions.

"This indictment is based on the claim by Bill Austin that he didn't know what was happening. That's untrue," said John Conard, attorney for former Starkey President Jerry Ruzicka.

The indictments continued an escalating conflict between Austin and some of his former business associates that burst into public view a year ago when the Eden Prairie-based company abruptly fired Ruzicka, who led Starkey for 17 years.

Ruzicka and two other former Starkey executives — Scott Nelson and Lawrence Miller — were indicted on multiple counts of fraud by a grand jury over schemes in which they allegedly padded their paychecks with unearned, six-figure bonuses and took steps to conceal those payments from Austin.

Moreover, Ruzicka and Nelson have been accused of creating shell companies that were used to siphon off millions of dollars through secret deals. Also charged in the indictment: former Sonion U.S. President William Jeffrey Taylor, who allegedly used his position as one of Starkey's major suppliers to earn millions of dollars in fraudulent commissions and consulting fees; and Lawrence Hagen, a former Starkey employee who allegedly helped Ruzicka and Taylor illegally resell Sonion equipment to other hearing aid makers for a profit.

Starkey officials rejected the idea that the company's majority owner was aware of the stock sale or any of the other disputed transactions.

"The notion that Mr. Austin knew and approved of the criminal conspiracy and related cover-up described in the U.S. government's indictment — alleging that more than $20 million was stolen from him — is absurd on its face," a Starkey spokesman said.

"We'd invite any interested party to read the detailed indictment that resulted from a yearlong investigation by the Department of Justice, the FBI, the IRS, the U.S. Postal Service and a grand jury, and then decide for themselves whether the story offered by the defense attorneys makes any sense."

The biggest scheme that is alleged in the indictment involved a $15 million stock sale at a Starkey subsidiary known as Northland LLC, which operated as Starkey's retail arm. Former Starkey executives say Northland operated hundreds of hearing aid stores in the U.S., including many outlets that failed under independent ownership and were later acquired by Northland as a way to keep the stores out of the hands of Starkey's competitors.

In 2006, Ruzicka asked Austin to let him take over Northland as "compensation for his years of service," according to court records. Austin refused, telling Ruzicka that would be a "conflict of interest" and distract him from his work at Starkey.

Later that year, Ruzicka and his co-conspirators secretly transferred the assets of Northland into a new company, Northland Hearing Centers, and rewarded themselves with 51,000 shares of stock in the new entity, according to the federal indictment. To make the deal legal, the indictment says, Ruzicka and Nelson "caused Austin's signature to be forged" on the closing documents.

In 2013, Ruzicka, Nelson and Northland President Jeff Longtain sold their stock to Starkey for $8.2 million. Starkey later sent another $7 million to the Internal Revenue Service to cover the trio's federal taxes on the illegal profits, according to the indictment.

"I do believe Mr. Austin was aware of that transaction," said Longtain, who was not indicted, though federal officials noted that he received some of the $15 million.

The other major scheme described by federal officials involved Archer Consulting, a company owned and controlled by Ruzicka and Taylor that allegedly acted as a middleman between Starkey and Sonion, one of two major producers of the receivers and microphones in hearing aids.

In the late 1990s, shortly after Austin made Ruzicka president of Starkey, the company was buying 100 percent of its receivers and microphones from Knowles Corp., the longtime market leader in the business, according to Bill Mauzy, Taylor's attorney. But Ruzicka thought it would be a good idea if Knowles had competition, so he began steering work to Sonion, a small competitor run by Taylor, the attorneys said.

By 2007, Starkey was buying 80 percent of its receivers and microphones from Sonion, and the price of the parts had come down by 50 percent, Mauzy said.

Conard said Starkey saved at least $10 million by buying discounted parts from Sonion.

Federal authorities say Ruzicka and Taylor found a way to profit off the growing business by creating Archer Consulting. As the head of Sonion's operations in the U.S., Taylor was already receiving commissions on the Starkey sales.

But he and Ruzicka managed to obtain another $7.65 million in commissions and fees for bogus consulting work through Archer Consulting between 2006 and 2015, according to the indictment. The payments typically ran about $75,000 per month and were split 50-50 between Ruzicka and Taylor, court records show.

"I can tell you that Jerry Ruzicka, on behalf of Starkey, and Jeff Taylor, on behalf of Sonion, engaged in a mutually beneficial transaction that was known by Bill Austin, was encouraged by Bill Austin and approved by Bill Austin," Mauzy said. "For him to make these sanctimonious statements of ignorance of the deal will be established as untruthful at trial."

Federal officials say Hagen participated in a similar scheme through a company called Claris Investments, which Ruzicka falsely presented as a Starkey affiliate to qualify for discounted prices on Sonion parts. Claris then resold those parts to a German company, earning $350,000 in commissions between 2004 and 2012, according to the indictment. Hagen, Ruzicka and Taylor split the proceeds.

The three partners also bought Sonion parts through a company called Archer Acoustics, earning $600,000 in commissions and rebates by reselling the parts to other hearing aid makers, according to the federal indictment. Once again, the three partners allegedly split the proceeds.

"Lawrence Hagen is a 63-year-old man who has never done anything wrong in his life and didn't do anything wrong here," said his attorney, Kevin Short. "He will be vindicated at trial."

Miller is not identified as a conspirator in any of the schemes. His indictment is tied to $882,500 in improper bonuses he allegedly earned from 2006 to 2015. While he was entitled to bonuses of up to $70,000 per year, he rewarded himself with another $50,000 per year in a secret "loyalty bonus" and concealed it from Austin, according to the indictment.

"Mr. Miller was charged for doing his job," said his attorney, Paul Engh. "His pay and bonus, which the indictment questions, was agreed to by Starkey without objection for over 28 years."

Ruzicka, Miller, Taylor and Hagen said they were not guilty of the charges in federal court, and they were all released from custody without the payment of bail. They have each been allowed to travel to foreign countries while they await trial, as long as they inform federal authorities at least seven days in advance.

Nelson has yet to be arraigned. His attorney, Jon Hopeman, said Nelson was ill and will answer the charges when he has recovered.

A trial for the five co-defendants has been tentatively scheduled for Dec. 19, though an extension is likely.

Jeffrey Meitrodt • 612-673-4132