Former Starkey CFO testifies for second day in fraud trial

Starkey's fired financial chief admitted deleting certain bonuses and stock compensation from a 2014 payroll report that he knew would be inspected by company owner Bill Austin.

On his second day testifying in a $20 million federal fraud trial in Minneapolis, Scott Nelson said he had constant concerns but altered documents, backdated his own employment contract and boosted the revenue growth on a key profit and loss statement anyway because he was asked to do so by his former boss, Jerry Ruzicka.

Asked whether he ever considered going to Starkey's owner with his concerns, Nelson said he did not because Ruzicka was his boss and assured him he had the proper authority and that to approach Austin would be "disloyal" to Ruzicka. Under cross examination, Nelson admitted that he shared at least some of the information with Austin.

Nelson has admitted to one count of conspiracy in connection with the government's wide-ranging case that accuses four other men of stealing millions in stock, bonuses, commissions, rebates and consulting fees from Starkey, America's largest hearing aid maker. Ruzicka, the Eden Prairie company's former president; Starkey's former human resources head Larry Miller; and former business associates W. Jeffrey Taylor and Larry T. Hagen have pleaded not guilty.

Nelson said he was concerned back in 2006 when his department recommended changing the structure of a real estate company called Northland US LLC to relieve some of Austin's tax liability. Ruzicka proposed that under the new corporate structure, himself, Nelson and Jeff Longtain — Northland's president who has pleaded guilty to a tax charge in connection with the case — be given 51 percent of the ownership, with Starkey retaining 49 percent.

Austin testified earlier in the trial that he did not approve the ownership shift. The defense says Austin knew and benefited from that transaction and others. The defense also alleges that Austin gave Ruzicka full authority to run Starkey, a claim Austin denies.

Nelson said he asked Ruzicka in 2006 about whether Austin knew about the Northland stock deal and whether Ruzicka really had the authority to execute that type of executive compensation. At the time, the Northland entity was small, with just about 35 stores under its wing.

But Nelson became alarmed again 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 have sales of more than $100 million.

There was fear, Nelson said, that if the three men waited until the restricted stock vested in 2016 to cash out their shares, the valuation would be so great that a stock payout could hurt Starkey.

To save Starkey money, Nelson said he and Ruzicka terminated the restricted stock early in 2013, resulting in $8.2 million in payments to the three men and $7 million in taxes. He said several payments were falsely recorded on Starkey's books as insurance policy premiums.

Hiding the payments would prevent other executives from feeling left out, Nelson said. Before the checks were deposited into the men's accounts, Nelson said 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 the former president of the Starkey subsidiary Northland Hearing Center, Jeff Longtain, from whatever Ruzicka was due as part of his Starkey employment contract.