According to a front-page article in the Saturday edition (January 16, 2015) of the Minneapolis Star-Tribune, Starkey Hearing Technologies’ former president Jerry Ruzicka has filed a whistleblower lawsuit against the company, alleging that Starkey owner 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. In response, the company has repeatedly emphasized that Ruzicka is the person who is under investigation by the US Federal Bureau of Investigation (FBI) and the Internal Revenue Service (IRS), and not Starkey, further stating that the company and its employees have been the victim of a possible crime.
Ruzicka’s civil suit alleges that Austin and his family used the company plane without reimbursing Starkey, thereby violating tax laws, and the company made payments totaling $50 million to the entertainment firm of Austin’s stepson, Steven Sawalich, for a movie and a reality show about the Starkey Hearing Foundation. Sawalich was the director of the 2007 movie Music Within and also produced a series called Operation Change that was broadcast on the Oprah Winfrey Network (OWN). The civil suit further contends that Austin’s other stepson, Starkey VP of Sales Brandon Sawalich, used company funds to remodel his home, kept money set aside for customer rebates, and with his mother Tani Austin, diverted $200,000 a month for another company they owned. Additionally, Ruzicka says Bill Austin was not licensed to fit hearing aids in Minnesota, which led to malpractice claims of $4.5 million. He also accused the company, Bill Austin, and Brandon Sawalich of defamation of character and violation of the terms in Starkey’s Employee Stock Ownership Plan.
Ruzicka and three other senior executives were fired on September 9, including Senior VP of Operations Keith Guggenberger, CFO Scott Nelson, and Senior VP of Human Resources Larry Miller. Since then, Guggenberger has filed a $10.9 million wrongful termination lawsuit that says 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. Guggenberger’s lawsuit suggested that Ruzicka had caused friction by refusing to promote Sawalich and may have been planning to leave Starkey and start another company. Then, on November 4, almost two 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. The DOJ’s letter further advised that the case is currently under investigation by the FBI. To date, there have been no indictments, and the FBI says it cannot comment on the ongoing investigation, including the target of the investigation or what crime may have been committed. Lawyers speaking for Ruzicka, Nelson, and the other fired employees have maintained that their clients did nothing wrong.
By design or coincidence, Ruzicka’s whistleblower lawsuit was filed just before Starkey’s largest and most important customer event in two years, its third biennial Hearing Innovations Expo, which starts on Wednesday evening in Las Vegas and runs through Saturday (January 20-23). Starkey’s attorneys have characterized the lawsuit as a “baseless claim,” and their counsel, David Bradley Olson of Henson & Efron law firm in Minneapolis, released the following press statement this week:
On November 4, 2015, the FBI and other federal agencies conducted a raid at former Starkey president Jerry Ruzicka’s home. Following the raid, the FBI notified Starkey that it was the victim of possible criminal activity. On Jan 14, 2015, Starkey learned that Ruzicka was in the process of filing a civil lawsuit against the company. Although Starkey cannot comment on the specifics of the lawsuit, we are confident that the investigation will show that Ruzicka abused the trust that was placed in him by, among other things, stealing millions of dollars from the company and its employees over a period of several years.
Starkey will continue to work with the authorities to ensure that justice is done and that Ruzicka is held accountable. Ruzicka’s civil lawsuit will succeed neither in diverting attention from his own conduct or delaying the inevitable. Nor will he succeed in again harming the company and the people he has already victimized through claims made in his civil suit.
The company emphasized to The Hearing Review that, if the FBI believed Starkey had committed a crime, it would have launched a criminal investigation. This is not the case, it says. The DOJ has requested that Starkey avoid providing any details about the conduct of certain former executives or the nature of the investigation, because doing so could impede the investigation and interfere with the enforcement of federal criminal law. Thus, the company and its executives have been reluctant about communicating details on the case. As a matter of human resources policy, Starkey also refrains from comment on terminations, former employees, or other confidential HR matters.
The firings, investigations, and lawsuits have continued to dominate conversation both within the hearing industry and in the financial community, even leading some market analysts to speculate on a merger or sale of the company, which as noted in a November 23 Hearing Review blog and in comments by a Starkey representative, appears highly implausible. Other industry rumors have swirled around the departure of another respected industry executive based in Minneapolis who had worked closely with Ruzicka, the compensation of certain consultants and employees within Starkey, and acquisitions made by Ruzicka on behalf of the company.
Another whistleblower lawsuit—this one filed against the Starkey Hearing Foundation—was reported by the Minneapolis Star-Tribune just before Christmas (December 23, 2015). In that lawsuit, a former “director-level” employee, Maria Vanessa Boys Smith, claims she was let go after objecting to what she characterized as an overstatement of the number of hearing aids provided by the Foundation. She also alleges that the Foundation routinely engaged in conflicts of interest with the private corporation.
Bill Austin owns 91% of Starkey, which he founded in 1967; employees own the rest. According to industry analysts, Starkey is the fifth largest hearing aid manufacturer in the world and is probably worth around $1 to $1.5 billion. The Starkey Hearing Foundation was started by Austin in 1984, and by law is required to operate separately from the company.
Ruzicka has filed a separate complaint with the American Arbitration Association that says he was promised $8.7 million over the next 10 years plus a 10% stake in the company upon Austin’s disability, death, or change in ownership. He also contends that the company still owes him $138,000 in unpaid wages.
Despite the turmoil, Starkey reports impressive sales in 2015, adding 110 new employees since September, and having its best fourth quarter in company history in spite of losing some ground in the hotly contested VA market. “The government’s investigation and other legal proceedings have had no negative impact on how the company continues to function,” stated Starkey Sales & Customer Relations Vice-president Lisa Richards. “Bolstered by strong sales, Q4 was a record quarter and contributed to fiscal 2015 as one of our most successful years. We are projecting that revenues and market share will be even better in 2016. Our continued success is a testament to our leadership team and our 4,800 employees.”