Starkey probe that resulted in a $20 million embezzlement case started with small betrayal

The scandal that continues to rock Starkey Hearing Technologies started with a small betrayal.

In July 2015, an employee at the nation's largest hearing aid manufacturer was approached by the outgoing president with a proposal: Come work at his new firm. But instead of joining the still-secret venture, which would compete with Starkey, the employee went to Starkey owner Bill Austin and spilled the beans, according to federal investigative records.

That confession kicked off an aggressive internal investigation that allegedly uncovered even greater secrets and ultimately resulted in the firing of company president Jerry Ruzicka, a purge of employees loyal to him and criminal indictments of Ruzicka and two other Starkey executives.

Ruzicka and other defendants have pleaded not guilty to the charges, which include allegations that Ruzicka used his position to embezzle more than $13 million through fraudulent stock transactions, unearned commissions and fake consulting fees. Ruzicka's attorney, John Conard, questioned the tactics used by Starkey's investigators and maintains his client acted legally.

The controversy has been a major distraction for Starkey, which is now embroiled in several lawsuits involving former employees who have accused Austin and his stepson, Starkey executive Brandon Sawalich, of improper and illegal business practices. Industry analysts say the investigation and resulting publicity have made the company vulnerable to its competitors, which are trying to boost their market share in the highly competitive business.

Many former executives and defense attorneys are puzzled by Austin's willingness to air his dirty laundry in public. Despite the magnitude of the alleged crimes, attorneys note that Austin was under no obligation to report the suspected theft to the authorities. In fact, several attorneys who handle internal investigations involving corporate misconduct said they have advised most of their clients to cut private deals instead of taking cases involving employee theft to prosecutors.

"You don't want to be associated with fraud — even if you're a victim," said Minneapolis attorney Chris Madel, a former federal prosecutor.

A Starkey spokesman said Austin felt compelled to act.

"Anyone who thinks the company and Mr. Austin should have 'kept quiet' when they uncovered evidence that more than $30 million was stolen obviously does not know all of the facts and does not know Mr. Austin," said Jon Austin, who is not related to the owner. "If crimes of this nature have been committed, those responsible should be prosecuted, not rewarded with a financial settlement that allows them to go away quietly."

In the summer of 2015, with his retirement from Starkey just a few months away, Ruzicka was trying to put together a new company called My Hearing Direct.

Though the new business would compete against Starkey, Ruzicka believed he was within his rights to discuss the venture with other Starkey employees because his 10-year employment contract did not bar him from engaging in such activities, court records show.

Austin saw things differently. As soon as he got wind of Ruzicka's plans, he brought in a team of outside attorneys from Minneapolis firm Henson & Efron to find out if he could shut down the venture and prevent his longtime president from leaving with valued employees.

But the scope of the probe quickly widened. The firm discovered a $15 million stock deal. Federal investigators allege that Ruzicka and two co-workers sold their stake in a Starkey subsidiary back to the company — even though Austin already owned the business.

The discovery was a key turning point, according to one source familiar with the investigation.

"Once we saw that, we decided to start looking into everything," said the source, who asked not to be identified.

But expanding the probe required more muscle. Henson & Efron decided to bring in WayPoint Inc., a go-to firm in the Twin Cities for companies that suspect employee misconduct. Founded in 2004, WayPoint's 19-member investigative team includes eight former FBI agents and four former criminal investigators from other federal agencies. The company charges "well over" $100 per hour for its services, according to former FBI agent Dennis Sackreiter, WayPoint's co-owner.

At any given time, Sackreiter said, his agency had six to eight investigators at Starkey's headquarters in Eden Prairie, interviewing employees and poring over thousands of internal documents.

Austin, however, did not wait for their findings before he started cleaning house. On Sept. 8, 2015, the founder and majority owner of Starkey summoned the two suspected ringleaders and fired them. During his initial meeting with Ruzicka, Austin asked him how much money he had misappropriated. Ruzicka's answer, according to what Austin told federal investigators: "About $10 million."

Ruzicka asked if he could meet Austin later that night at Campiello, a popular Italian restaurant in Eden Prairie. During that meeting, according to federal authorities, Ruzicka asked Austin if he was willing to write off the missing money in exchange for letting Austin keep the $8.7 million in pension payments Ruzicka had coming. Austin refused, court records show, telling Ruzicka he had yet to uncover the extent of his possible crimes.

Starkey chief financial officer Scott Nelson, another suspected leader in the new venture, also got the ax. Like Ruzicka, Nelson asked if it was possible to deal himself out of trouble, according to federal authorities. Nelson has been indicted on multiple counts of fraud for allegedly embezzling more than $5 million through the stock sale and unearned bonuses.

Nelson was ill when his co-defendants — including another executive, Lawrence Miller, and two business associates outside of Starkey — were arraigned last month, but he will plead not guilty to the federal charges this week, according to his attorney, Jon Hopeman .

By the end of October, WayPoint investigators had uncovered evidence that Ruzicka and other Starkey employees may have committed crimes while working at Starkey, according to federal records. Bill Austin had to decide what to do with the findings.

WayPoint's recommendation was to turn the case over to federal authorities, and Austin agreed.

Conard, Ruzicka's criminal lawyer, noted that WayPoint's investigators were able to use the same tactics they employed while working for the FBI without worrying about protecting people from incriminating themselves or their friends.

"They can destroy recordings and other evidence at any point until the decision to involve the federal government is made," Conard said.

In an affidavit attached to a search warrant in the Starkey case, FBI agent Brian Kinney repeatedly cited Waypoint's evidence, noting that he is "familiar with the investigators" and "know them to be credible and reliable."

Attorneys not involved in the dispute said an out-of-court settlement could have maximized Austin's chances of recovering any missing money and kept Starkey's troubles out of the press, but they said it's hard for some company owners to overlook a major betrayal of confidence.

"Given the allegations in this case and the dollar amounts involved ... I would have been shocked if this had not been brought to the attention of federal authorities," said former federal prosecutor Hank Shea, who now teaches at the University of St. Thomas law school.

At an employee meeting in December 2015, Austin said he was "hurt to the core" by the alleged crimes. "It was worse than any of you could imagine," he told workers, according to recording of the meeting obtained by the Star Tribune.

Austin, through the Starkey Foundation, is well acquainted with high-ranking politicians and has gone on missions to give hearing aids to the needy in foreign countries with former U.S. President Bill Clinton. But he told workers those ties had nothing to do with the "friendly" federal investigation.

"No, I did not seek out the FBI or use any influence whatsoever to engage them," Austin said.

Jeffrey Meitrodt • 612-673-4132

Dee DePass • 612-673-7725