Starkey trial talk of town as legal, business experts dissect split verdict

The split verdict in the closely watched $20 million embezzlement trial regarding Starkey Laboratories was the talk of the legal community Friday as lawyers and business experts dissected the white-collar criminal case.

The six-week federal trial followed more than two years of investigation. In the end, former Starkey President Jerry Ruzicka on Thursday was found guilty on eight of 25 counts of wire, mail and tax fraud and embezzlement for his role creating sham companies and for siphoning $15 million worth of company stock proceeds for himself and two others.

Business associate W. Jeff Taylor was convicted on three of 16 counts for mail and wire fraud for his role benefiting from two sham companies he co-owned with Ruzicka. The jury acquitted two other co-defendants — former Starkey human resources chief Larry W. Miller and business associate Larry T. Hagen.

Legal experts said sentencing guidelines suggest Ruzicka could receive up to 13 years in prison and that Taylor could receive two to three years. U.S. District Court Chief Judge John Tunheim is expected to render sentences later this spring or summer.

The split verdict did not shock several Minnesota attorneys who watched the case closely, even before the trial, as Starkey owner Bill Austin and the defendants threw accusations of wrongdoing back and forth.

Others noted that the defense might have won points in jurors' minds when they succeeded in getting two statements by Austin, who was a key government witness, stricken from the court record because the judge ruled the testimony false.

Throughout the trial, defense attorneys hammered away at Austin's credibility and tried to show that he had an extreme lack of oversight of his company, the largest U.S. hearing aid manufacturer.

"The fact that a Starkey executive and a business associate got acquitted really indicates that the jury may have felt the [financial] controls here were lax," said JaneAnne Murray, a law professor and criminal defense attorney in Minneapolis who was not involved in the Starkey case.

As for the two convictions, other local attorneys noted that the prosecution successfully showed Ruzicka and Taylor concealed many financial transactions by using code names like "Geronimo Rose," the "shareholders," "the vendors" and various pronouns when e-mailing about possibly illegal business operations. The government also convinced two former Starkey executives to plead guilty and testify for the prosecution.

Laying out a complex case

For the prosecution, "the most powerful tools were the two witnesses that flipped," said Carlson School corporate law Prof. Paul Vaaler.

Former Starkey finance chief Scott Nelson and Jeff Longtain, president of Northland Hearing Centers — the subsidiary at the center of the prosecution's case — pleaded guilty and testified about the Northland stock deal and Ruzicka's role in executing that scheme.

"[They] just had such deep knowledge of Starkey and its Northland [subsidiary] that they helped the jurors understand this case and who did what," Vaaler said.

Then there were the records — 1.8 million pages of documents that prosecutors and the defense team used to lay out their cases before jurors, who came from as far away as Austin and Rochester to hear the case.

"Most of us who know something about [this case] were content with the jury resolution on the matter. We were not going to second-guess the jury. But we did feel that the court proceedings were short of defendants," said Fred Zimmerman, a manufacturing expert, author and University of St. Thomas professor emeritus.

"There are standards of corporate protocol which owners, executives, managers and employees should all abide by," Zimmerman said. "And perhaps some questions regarding whether appropriate protocol was observed in the case of Starkey is still a question."

For example, he said Austin should not be the sole member of the board of directors of Eden Prairie-based Starkey. There also should be an audit committee to review results and an entire team to take action on problems — not just Austin.

Starkey "needs a lot of things that much smaller companies have that Starkey appears to not have — especially since Starkey is partially owned by employees," Zimmerman said.

Legal wrangling not over

Vaaler, the Carlson School professor, said the criminal trial might be over and two defendants may be going to jail, but he doubts the legal wrangling is over. He said Starkey employees could sue Austin for mismanagement and failing to protect their interests in Starkey's employee stock ownership plan (ESOP).

"The trial demonstrated that Starkey is the Peyton Place of corporate governance," Vaaler said. Austin and Ruzicka were both the trustees of the ESOP. "The trial showed that one of them acted criminally and one of them acted negligently when it came to protecting [the ESOP]."

Prosecutors argued that documents in evidence showed a history of forged signatures, deleted payroll records, concealed checks and hidden payments.

"Bill Austin is not convicted of anything. But I think he will be facing other liability claims that relate to his position as a trustee of the ESOP," Vaaler said. "He had a fiduciary obligation to act carefully and loyally to that ESOP. Starkey is his company to use, but it's not his ESOP. There are regulations."

Murray, the criminal defense attorney, said she would not be surprised if Ruzicka receives 11 to 13 years in prison. "I expect the sentencing guidelines for Mr. Ruzicka will be extremely high because of the amount of money involved in the [guilty] counts."

Ruzicka was convicted of helping to steal $15 million by transferring and later cashing in restricted stock in the Northland subsidiary. The proceeds were split among Ruzicka and the two defendants who pleaded guilty, Longtain and Nelson.

Murray said federal sentencing guidelines require judges to evaluate the size of a fraud, the defendant's position of leadership, if trust was abused and if financial institutions were defrauded. A point system ascribes months of prison time.

Dee DePass • 612-673-7725