The fired finance chief of Starkey Laboratories said Friday that a business setup at the center of a criminal fraud case against him, other former executives and business associates started as a way to slash the tax liabilities of the company’s owner, Bill Austin.
Scott Nelson, who pleaded guilty to a count of conspiracy in connection with the case, was testifying for the government in a case that alleges $20 million was embezzled from Eden Prairie-based Starkey through fraudulent stock payments, bonuses, commissions and discounts.
On trial in U.S. District Court in Minneapolis are Jerry Ruzicka, Starkey’s former president; Larry Miller, the company’s former human resources chief; and business associates W. Jeffrey Taylor and Larry T. Hagen. All four have pleaded not guilty to the charges.
Nelson — who worked for Starkey, the largest hearing aid manufacturer in the United States, from 1997 until he was fired in 2015 — said his finance department recommended transferring the assets of Northland U.S. LLC to a new corporate entity. He said Austin bore the full tax burden of Northland U.S. because it was a limited liability company and Austin was the sole owner.
Austin first used Northland U.S. to hold his personal real estate. But later, it was used by Starkey to buy scores of struggling retail hearing aid stores, which kept the small retailers out of the clutches of the hearing aid company’s competitors.
Nelson said if the subsidiary holdings were reorganized into Northland Hearing Center Inc. (NLHC), owned fully by Starkey, it would solve Austin’s tax dilemma.
Ruzicka, Nelson said, suggested making the corporate move but instead 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. Starkey would own 49 percent of the company.
Nelson said Ruzicka told him the new ownership setup would act as a retention tool and motivate the three executives to help expand the fledging retail entity.
Ruzicka told Nelson that Austin had previously told him he “could do whatever he wanted” with the retail operation.
Ultimately, the Northland stock was cashed in, netting the three executives $15 million in payments in 2013.
Austin testified earlier in the trial that he ordered an internal investigation after being told that Ruzicka was recruiting Starkey employees to work at a new hearing aid company Ruzicka would run once his employment contract expired at Starkey in 2016.
That initial investigation turned up Northland and other transactions Austin said were questionable.
The investigation subsequently led to the fall 2015 firings of the executives, a federal investigation and the indictments, the U.S. attorney’s office has said.
Nelson said on the stand Friday that he signed his own name and also signed Austin’s name twice on documents leading to the Northland ownership switch.
Earlier this week, Austin testified that he never gave Ruzicka or Nelson authority to sign his name to documents.
He also said he did not give permission for the forming of NLHC and would have never approved a deal that gave Starkey minority ownership in anything. In addition, he said he was unaware of the stock sale.
Defense attorneys have said the transactions were done with Austin’s full approval or within the authority that Austin had given Ruzicka. They also said he should have seen public documentation that outlined the ownership of Northland in several places.
Nelson is scheduled to continue his testimony on Monday.