MINNEAPOLIS, MINNESOTA — The former Starkey Chief Financial Officer, Scott Nelson, took the stand for two days of testimony on February 16th and 19th in the $20 million federal fraud trial in Minneapolis. Jerry Ruzicka, Starkey’s former president; ex-human resources head Larry Miller; and former business associates W. Jeffrey Taylor and Larry T. Hagen all have pleaded not guilty.
Much of Nelson’s testimony over the two days concerned the structure of a real estate company called Northland US LLC. Northland US was eventually reorganized into Northland Hearing Center Inc. (NLHC) to solve Austin’s tax dilemma.
According to the February 16 testimony, Austin first used Northland US to hold his personal real estate. But later, it was used by Starkey to buy dozens of struggling retail hearing aid stores, which kept the small practices away from Starkey’s competitors.
In his testimony, Nelson said it was Ruzicka who suggested the restructure. Ruzicka then advised transferring NLHC’s majority ownership to himself, Nelson and NLHC’s president, Jeff Longtain, who has pleaded guilty to one count of tax evasion and has already testified for the prosecution. Under this structure, Starkey would own 49% of the company.
Nelson also said Ruzicka told him the new ownership setup would act as a retention tool and motivate the three executives to help expand the fledgling retail entity, and that Austin had previously told Ruzicka he “could do whatever he wanted” with the retail operation. A full account of Friday’s trial proceeding can be found here.
Former CFO Admits Altering Financial Documents
During the second day of his testimony the fired CFO admitted to deleting certain bonuses and stock compensation from a 2014 payroll report that he knew would be inspected by company owner Bill Austin. Nelson said he had constant concerns about his own actions, but altered documents anyway. He also shared with the jury that he backdated his own employment contract and boosted the revenue growth on a key profit and loss statement because he was asked to do so by his former boss, Ruzicka.
According to testimony, Nelson became alarmed in 2012 when an appraisal firm informed him that the value of Northland Hearing Centers was rising rapidly. Northland had acquired more than 300 retail stores and grown to sales of more than $100 million.
To save Starkey money, Nelson said he and Ruzicka terminated the restricted stock early in 2013, resulting in $8.2 million in payments to Ruzicka, Longtain and Nelson along with $7 million in taxes. Nelson said several payments were falsely recorded on Starkey’s books as insurance policy premiums.
Hiding the payments would prevent other Starkey executives from feeling left out, Nelson said. Before the checks were deposited into the men’s accounts, Nelson went on to say that he again pressed Ruzicka about his authority to execute such large payouts. Ruzicka assured him that he had full authority, noting that such power was written into Ruzicka’s job description.
Nelson also told the court that if Austin ever balked at the restricted stock sale and payment, that Ruzicka would simply pay Nelson and Longtain from whatever Ruzicka was due as part of his Starkey employment contract.
A full description of Monday’s trial can be found here.
Defense Cross-examines Nelson, Lifestyle of Current Starkey President Comes Under Scrutiny
Defense attorneys for Ruzicka and his former colleagues cross-examined Nelson about several sordid details involving current Starkey president Brandon Sawalich. Defense attorneys have argued throughout the trial that the alleged misdeeds of company owner Bill Austin and his stepson are tangled in the case against their clients. (Both Sawalich and Austin deny any wrongdoing in the case.)
Nelson claimed in testimony that Sawalich, who is also board chairman of the Hearing Instrument Association – an organization that represents the interests of hearing aid manufacturers and other firms associated with the hearing industry – was a liability to the company because of his lavish spending habits and allegations of inappropriate relationships with other Starkey employees. Nelson, in his testimony, even alleged that one former employee was paid a six-figure settlement after she filed a sexual harassment claim.
Among the expenses Sawalich was said to incur, according to the defense, that were paid by Starkey included the use of a private jet, a lavish 40th birthday at the home of President George Washington, the purchases of a horse, chicken coop and ice skating rink as well as several hundred thousand dollars’ worth of house renovations.
Testimony also involved payments to an entity called Deering18. These payments were allegedly made to Sawalich each month and ranged between $200,000 to $250,000. 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.
Nelson told the court that he and other executives worried Sawalich’s behavior could eventually hurt the company. Asked about plans to promote Sawalich, Nelson told the jurors, “I did not think he was qualified” to serve as president.
Prosecutors and Starkey say the allegations have nothing to do with the case involving Ruzicka and the three other defendants. In addition, Jon Austin, a Starkey spokesman, told the Minneapolis Star Tribune the allegations were “unfounded and unsubstantiated rumors, half-truths, innuendo and outright lies.”
For a full account see the Star Tribune
Source: Dee DePass, Minneapolis Star Tribune
Post-publication update: Starkey Hearing Technologies’ former president, Jerry Ruzicka, was found guilty on March 8, 2018 in the $20 million federal fraud trial. In a split decision, W. Jeff Taylor, former president of Sonion was also found guilty in 3 of 16 counts against him, while Larry Miller and Larry Hagen were found not guilty. Read the latest details on the verdict here.