Under cross-examination, ex-Starkey CFO alleges sexual misconduct by Bill Austin's stepson

Defense attorneys in a $20 million embezzlement case against two former Starkey Laboratories executives and two business associates have argued that alleged misdeeds of company owner Bill Austin and his stepson are tangled in the case against their clients.

They continued this week with that line of thought in cross-examining Scott Nelson, Starkey's former chief financial officer who pleaded guilty to one count of conspiracy in connection with the case. Through attorneys, Austin and stepson Brandon Sawalich again denied wrongdoing.

Nelson testified for the prosecution that Austin was not always aware of payments approved by Starkey's fired president, Jerry Ruzicka. Nelson said he was regularly ordered by Austin to use company funds to pay the frequently extravagant living expenses of Sawalich.

Nelson told jurors that Sawalich — who is now the Eden Prairie-based company's president — was seen as a "liability" by executives because of his lavish company expenses and because of a history of extramarital affairs with Starkey employees. Starkey ended up paying a "six figure" settlement when one of the women filed a sexual harassment lawsuit, Nelson said.

Asked if Sawalich was viewed inside Starkey as a "serial harasser of women employees," Nelson said yes. Defense attorneys showed Nelson pictures of at least eight "Jane Does," and Nelson said he was familiar with relationships between Sawalich and all but one of the women.

Prosecutors and Starkey said the allegations have nothing to do with their case, which accuses Starkey's former president Ruzicka; former company human resources chief Larry Miller; and former Starkey business associates W. Jeff Taylor and Larry T. Hagen of stealing $20 million in restricted stock, bonuses, commissions, rebates and fees from Starkey and Austin.

"From the beginning of this case, the criminal defendants have made it clear that their strategy is to distract from the fraud and conspiracy charges against them by trying to defame and demean Mr. Austin and his family through unfounded and unsubstantiated rumors, half-truths, innuendo and outright lies," said Starkey spokesman Jon Austin.

But the defense did try to tie at least one payment in question to the conduct of Sawalich. Nelson said under cross-examination that Ruzicka had given Miller a bonus because of the extra work involved in tracking potential liability issues with female employees because of Sawalich's conduct.

Sawalich's tendency to boast about his exploits caused several executives to have discussions with Ruzicka and Austin. As a result, Nelson said Sawalich was told to stop dating employees and boasting about affairs.

Nelson also said invoices for the use of a company jet; purchases of a horse, chicken coop and ice skating rink; cleaning of a fish tank; and several hundred thousand dollars' worth of house renovations were all Sawalich's personal expenses. The bills were paid by Starkey.

Nelson said Sawalich threw himself a lavish 40th birthday party two years ago at Mount Vernon, the Virginia museum that was home to President George Washington. Sawalich allegedly flew in hundreds of guests for the celebration, all on Starkey's dime.

Nelson said the expenses should have been recorded as personal income for Sawalich instead of a company expense deduction.

The defense also asked Nelson about payments to an entity called Deering18. Nelson said he did not know what the payments were for but issued them after Austin told him to. E-mails from Sawalich specified the amount to be paid, usually in the range of $200,000 to $250,000 each month, Nelson said.

The defense submitted a business document exhibit to the court showing that the business manager of Deering18's bank account was Sawalich. The mailing address for Deering18 was the Texas residence owned by Bill and Tani Austin, who is Brandon Sawalich's mother.

If the annual sum — of $2 million to $2.5 million — ended up with Sawalich, Nelson said, it should not have been marked as a company expense but as either taxable income for Sawalich or a taxable gift from Bill Austin to Sawalich.

While Nelson said he "finally put a stop to" Starkey paying for many of Sawalich's personal expenses, he was less successful trying to get Sawalich to stop dating female employees.

Nelson said he and other executives worried that Sawalich's behavior could eventually hurt Starkey. Asked about plans to promote Sawalich, Nelson told the jurors, "I did not think he was qualified" to serve as president of Starkey, the largest U.S. maker of hearing aids.

In previous court documents, Ruzicka laid out that there was a falling-out between Ruzicka and Austin over Sawalich's possible promotion back in late 2014. That and Ruzicka's plans to start a competing hearing aid company after retiring are what ultimately led to an internal investigation that uncovered the alleged embezzlement.

The four defendants maintain that Austin either knew or should have known about the $20 million in combined stock and financial payments that are at the center of the government's fraud case.

Dee DePass • 612-673-7725