Updated September 22, 2016
According to a press statement from US Attorney’s Office District of Minnesota, five prominent hearing industry executives have been indicted for conspiring to steal more than $20 million from Starkey Hearing Technologies and its principal owner William (Bill) F. Austin. US Attorney Andrew M. Luger today announced a federal indictment of fraud involving three former Starkey executives—former President Jerry Ruzicka, former CFO Scott Nelson, and former Senior VP of Human Resources Larry Miller—along with former Sonion President Jeff Taylor, and Larry Hagen, the founder of Micro-Tech and co-founder of SoundPoint Audiology (now part of Starkey and Starkey-owned All American Hearing, respectively).
The case is the result of an investigation conducted by the FBI, Criminal Investigation Division of the IRS, and the US Postal Inspection Service. The defendants are expected to make their initial appearances in US District Court in Minneapolis later this week. According to a report in the Minneapolis Star-Tribune, Ruzicka’s attorney John C. Conard, said Ruzicka “has done nothing wrong,” and Larry Miller’s attorney, Paul Engh, said the indictment “is not an accurate rendition of what happened.”
However, US Attorney Luger said in the press statement, “This indictment describes a massive and long running fraud scheme against a corporation by those in positions of trust. The defendants carried out a complex scheme to accomplish a simple goal: to embezzle funds for their own benefit. Our federal law enforcement partners at the FBI, IRS, and US Postal Inspection Service conducted a thorough investigation that exposed the defendants’ greed and abuse of trust.”
“The charges today demonstrate an unrelenting effort by the FBI and our law enforcement partners to bring to justice those who are involved in corporate fraud schemes,” said FBI Special Agent in Charge for the Minneapolis Division Richard T. Thornton. “The FBI will continue to aggressively investigate business executives and others who misuse their positions for personal enrichment.”
The charges follow a year-long series of high-profile firings and departures at Starkey, as well as accusations and counter-accusations that began with the firing of Ruzicka, Nelson, Miller, and Senior VP of Operations Keith Guggenberger on September 9, 2015. At that time, Ruzicka was the longest-serving US president among the global “Big 6” hearing aid manufacturers (Starkey president for 17 years), and he had worked in the hearing industry for over 35 years, serving two terms as president of the Hearing Industries Association. After the firings, at least four wrongful termination, as well as two whistleblower, lawsuits were filed by various parties against Starkey, and the FBI searched Ruzicka and Nelson’s homes.
The charges. According to the indictment, between 2006 and September 2015, the defendants conspired to embezzle and misappropriate money and business opportunities belonging to Starkey and Sonion, which supplied hearing aid components to Starkey. The indictment alleges that the co-conspirators deployed various tactics to steal from Starkey, including controlling a complicated web of sham companies and dummy entities, surreptitiously awarding themselves restricted stock in Starkey’s retail affiliate, and embezzling money from the company by causing payments to be made by Starkey for the benefit of the co-conspirators and others.
In 2006, Ruzicka and Taylor allegedly created a sham company called Archer Consulting, and Ruzicka directed Starkey to pay the company “commission” for purported sales of hearing aid components from Sonion, where Taylor was president. In 2010, the two men reportedly changed the description of the fraudulent payments from “commissions” to “consulting fees.” Thereafter, the indictment says that Ruzicka had Starkey pay consulting fees to Archer Consulting of $75,000 per month. Between 2006 and 2015, Ruzicka and Taylor are accused of stealing approximately $7,650,000 through their sham company.
Ruzicka, Taylor, and Hagen are also reported to have controlled two dummy entities, Claris Investments and Archer Acoustics, and Taylor is said to have falsely told Sonion that these entities were Starkey affiliates, thereby securing Starkey’s discounted pricing on hearing aid components for the companies. Ruzicka, Taylor, and Hagen then allegedly used their entities to purchase the discounted products that they later resold to other manufacturers to obtain illicit profits. At times, the illicit profits came in the form of fraudulent commissions and rebates, and the defendants obtained at least $600,000 in profits, commissions, and rebates by fraudulently leveraging Starkey’s purchasing power for their own benefit, says the indictment.
The charges also involve Starkey’s retail affiliate, Northland US, LLC, which Austin created as sole owner in 2002. The purpose of Northland LLC was to acquire and operate retail hearing aid establishments. According to the indictment, in 2006, Ruzicka and Nelson surreptitiously transferred Northland LLC’s assets, without Austin’s knowledge, to a new entity they controlled, Northland Hearing Centers Inc. They allegedly forged Austin’s signature to complete the transfer of assets, later awarded themselves restricted stock, and ultimately paid themselves and another individual approximately $15 million in exchange for terminating the restricted stock grants.
The indictment also states that Ruzicka, Nelson, and Miller abused their positions of authority as Starkey executives to embezzle money and fraudulently obtain benefits from Starkey. Ruzicka is said to have awarded himself and other co-conspirators hidden bonuses that were concealed from Austin by falsifying compensation reports. For example, according to the US Attorney’s Office, Ruzicka embezzled $200,000 from Starkey in 2014 under the guise of “officer’s insurance,” and used the funds to pay his state and federal personal income taxes. The indictment also alleges that he illegally obtained a 2011 Jaguar automobile that Starkey purchased for his use at a cost of over $119,000. Starkey paid the fees, insurance premiums, and other costs associated with the automobile; nevertheless, in July 2015, Ruzicka allegedly transferred ownership of the car from Starkey to himself by signing the title as both representative of the seller and also as the buyer, and did not pay Starkey for the vehicle or report it as a taxable benefit.
According to the indictment, Nelson used more than $200,000 in Starkey funds to purchase a condominium so that he could carry on a clandestine personal relationship with a Starkey employee. The US Attorney’s office also charges that he further stole $225,000 to replenish his personal investment account after he bought a home in Prior Lake, Minn. To conceal this theft, Nelson allegedly prepared a phony “promissory note” to disguise this illicit payment as a loan from Starkey, and never reported the “loan” on Starkey’s loan register or made payments on the loan.
“The indictment of these executives alleges the misuse of their positions of trust within their corporations,” said SAC Shea Jones IRS Criminal Investigation of the St Paul Field Office. “High-ranking corporate officials hold positions of trust not only in their companies but also in the eyes of the public. That trust is broken when such officials abuse their power and commit crimes.”
According to the US Attorney’s Office District of Minnesota, the indictment charges the five men with:
Jerome C. Ruzicka, age 59: One count of conspiracy to commit mail fraud and wire fraud, 6 counts of mail fraud, 16 counts of wire fraud, 2 counts of conspiracy to commit money laundering, and 4 counts of financial transactions involving fraud proceeds.
Scott A. Nelson, age 58: One count of conspiracy to commit mail fraud and wire fraud, 2 counts each of mail fraud and wire fraud, and one count of financial transactions involving fraud proceeds.
W. Jeffrey Taylor, age 55: 1 count of conspiracy to commit mail fraud and wire fraud, 4 counts of mail fraud, 10 counts of wire fraud, 2 counts of conspiracy to commit money laundering, and 4 counts of financial transactions involving fraud proceeds.
Lawrence W. Miller, age 53: One count of conspiracy to commit mail fraud and wire fraud, and 4 counts of wire fraud.
Lawrence T. Hagen, age 63: One count of conspiracy to commit mail fraud and wire fraud, 3 counts of wire fraud, and one count of conspiracy to commit money laundering.
Charges shock Starkey. In total, the five men are alleged to have conspired to steal more than $20 million from Starkey and Sonion. When details of the scheme were discovered in September 2015, Ruzicka, Nelson, and Miller were terminated by Starkey, and Taylor was also terminated by Sonion when the company suspected fraud, according the US Attorney General’s Office.
“To say that we’re shocked by the betrayal and breach of trust described in today’s federal grand jury indictments would be an understatement,” wrote Starkey spokesperson Jon Austin (no relation to Bill Austin) in an email today to The Hearing Review. “They describe a web of criminal activity and concealment among former top executives—who used forged signatures, fake invoices, fictitious vendors, and falsified pay records to steal from the company and its founder. That description is in marked contrast to our long-held values and those of our separate foundation, the mission of which is to provide free hearing aids and the priceless gift of hearing to some of the world’s poorest people.
“Today’s indictments are the result of a year-long federal criminal investigation,” continued the spokesperson’s email. “As the victim, we have been cooperating with the government and will continue to do so. While there undoubtedly will be other developments in this matter as the prosecutions run their course, we will continue to be focused on our business, our customers and our core mission. After nearly 50 years, the 4,800 members of the Starkey family remain grateful for the opportunity to bring the gift of hearing to those in need.”
In January 2016, Ruzicka filed a whistleblower lawsuit against the Starkey, alleging that Bill Austin and his family diverted large sums of money illegally from the company and violated tax laws, and also used old components in hearing aids designated for use in the Starkey Hearing Foundations’ humanitarian efforts. Starkey has maintained that it is not the subject of any FBI investigation. Details from a subsequent wrongful termination lawsuit filed by former Senior VP of Operations Keith Guggenberger suggested the firings were the result of an inter-office power struggle that created a schism between Austin and Starkey VP of Sales Brandon Sawalich versus Ruzicka and other executives. However, on November 4, 2015, almost 2 months after the firings, FBI agents raided the homes of Ruzicka and Nelson, taking files, computers, and one of Ruzicka’s vehicles. On November 17, the US Department of Justice (DOJ) informed Starkey in a letter that the company had been identified as a possible crime victim.
Look for more updates on this story as more information becomes available.