Trial begins in $20 million embezzlement case at Starkey Labs

After two years of public back and forth between Starkey Laboratories owner Bill Austin and two executives he fired, the accusations went to a federal trial Wednesday on charges that the two executives and two of their associates embezzled $20 million from the company.

Assistant U.S. Attorney Benjamin Langner told jurors in his opening statement that the defense team's arguments would be "distractions" from the theft case put before them.

"Jerry Ruzicka abused his power and autonomy, and the autonomy that he had to steal from Starkey [and also the firm Sonion] and all of their employees," he said. Langner accused Ruzicka of forgery, creating sham companies and fake invoices and rebates that netted him millions.

But the attorneys for Ruzicka, Starkey's former president; Larry Miller, the former human resources chief; and business associates W. Jeffrey Taylor and Lawrence T. Hagen shot back that there was no wrongdoing and that Starkey, the country's largest manufacturer of hearing aids, made tens of millions of dollars because of the actions performed by each of the defendants.

Ruzicka's attorney, John Conard, told jurors that there was no fraud and that his client saved Starkey from bankruptcy, lawsuits and industry mistrust created by Austin.

He said Austin gave Ruzicka permission and in some cases ordered him to sign documents on his behalf.

Miller's attorney, Paul Engh, told jurors that his client is falsely accused of issuing himself illegal bonuses worth hundreds of thousands. Instead, Engh said, Austin was the actual "fraudster" in the case, contending that Austin misrepresented compensation reports by failing to report payoffs in the form of bonuses and other financial benefits to female employees whom Austin and his stepson, Brandon Sawalich, allegedly sexually harassed.

Langner said the U.S. attorney's office will show that the four defendants, plus two other former Starkey executives who already pleaded guilty, "conspired" and stole $20 million from Starkey without Austin's knowledge. Austin is expected to be a witness.

Jurors were selected Tuesday in the case that alleges fraud, conspiracy and theft. The trial in front of Chief Judge John R. Tunheim in U.S. District Court in Minneapolis will be complicated and could take at least six weeks.

On Wednesday, after the opening statements, the first two witnesses were called.

Prosecutors said they also will call to the stand Scott Nelson, former Starkey chief financial officer, who faces five years in prison for conspiracy after pleading guilty and Jeffrey Longtain, former head of Starkey's Northland Hearing subsidiary, who faces up to three years in prison after pleading guilty to tax evasion charges.

The U.S. attorney's office has accused Ruzicka, with Nelson's help, of secretly transferring and selling $15 million worth of restricted stock options in Northland Hearing that actually belonged to Austin.

But the government insists Ruzicka "was a ring leader" who along with colleagues committed theft, stock fraud and established sham companies designed to swindle money from Starkey and from a key supplier named Sonion.

The case also involves counter-allegations by the defendants. Beyond the harassment charges, they accuse Austin of tax fraud, including pretending that his primary residence is in Texas and not Minnesota, Conard told jurors.

In a ruling before jury selection began, Tunheim said that while evidence supporting some of their allegations could be "highly prejudicial," it is necessary for Miller's and Ruzicka's defenses.

The judge also agreed to allow evidence regarding Austin's divorce settlement and regarding the defendants' allegations that Starkey donated "defective hearing aids to impoverished individuals in other countries."

Court documents from Austin's long-ago divorce from Cynthia Lee Dawson-Austin show his ex-wife brought claims against her former husband for fraud and breach of fiduciary duty, among other allegations, Tunheim's ruling said.

In past public statements, Austin has maintained that he was the victim of fraud and had been "wronged" after being extremely loyal to Ruzicka and his other executives. Austin's attorneys said the allegations will be refuted during the case.

"In the face of two guilty pleas, we expect the defendants will make every effort to distract the jury by attempting to smear their former colleagues and anyone who testifies against them," said Jon Austin, a spokesman for Starkey. "While we don't believe these diversionary tactics have any bearing on why millions left the company and ended up in the defendants' pockets, we're confident the jury will see them for what they are: an attempt to divert attention away from the crimes for which they have been charged."

In all, attorneys said the trial will involve scores of witnesses and thousands of pages of e-mails, employment and sales contracts, bank and stock records and insurance policies.

Two Starkey employees testified Wednesday that they approached senior managers at the company in 2015 after learning that Ruzicka was planning to start another hearing aid company once he retired in 2016. Their concerns prompted Austin to call his attorneys and start an internal investigation into Ruzicka.

Langner said that investigation led to a records review that found documents indicating theft.

Holly Schissel, director of Starkey product management, testified that Ruzicka told her that the new company would deal with "hearables," which are hearing devices not regulated by the Food and Drug Administration that use smartphone apps to control features. Schissel said he tried to recruit her and that she was initially flattered, but soon became uncomfortable.

First, she heard Ruzicka tell a Starkey client he wouldn't be the company's president much longer. Ruzicka also tried to squash Starkey's plans to offer its own hearables product, she said.