United States v. Ruzicka
| Decision Date | 11 January 2018 |
| Docket Number | Criminal No. 16-246 (JRT/FLN) |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. JEROME C. RUZICKA, SCOTT A. NELSON, W. JEFFREY TAYLOR, LAWRENCE W. MILLER, and LAWRENCE T. HAGEN, Defendants. |
| Court | U.S. District Court — District of Minnesota |
Gregory G. Brooker, Interim United States Attorney, and Benjamin F. Langner, Lola Velazquez-Aguilu, and Surya Saxena, Assistant United States Attorneys, UNITED STATES ATTORNEY'S OFFICE, 300 South Fourth Street, Suite 600, Minneapolis, MN 55415, for plaintiff.
John C. Conard, JOHN C. CONARD PLLC, 310 Fourth Avenue South, Suite 5010, Minneapolis, MN 55415, for defendant Jerome C. Ruzicka.
Casey T. Rundquist and William J. Mauzy, MAUZY LAW PA, 800 Hennepin Avenue, Suite 800, Minneapolis, MN 55403, for defendant W. Jeffrey Taylor.
Paul C. Engh, 200 South Sixth Street, Suite 420, Minneapolis, MN 55402, for defendant Lawrence W. Miller.
Kevin J. Short, 150 South Fifth Street, Suite 3260, Minneapolis, MN 55402, for defendant Lawrence T. Hagen.
Defendants Jerome Ruzicka, W. Jeffrey Taylor, Lawrence Miller, and Lawrence Hagen have been charged in connection with the alleged embezzlement of funds from Starkey Laboratories. The Government and Defendants have brought motions in limine in advance of trial to resolve a number of evidentiary disputes. The Court issues this Opinion and Order to address those motions.
During all times relevant to the Indictment, Starkey Laboratories Inc. ("Starkey") was a Minnesota Corporation that developed, manufactured, and distributed hearing aids in the United States. (2d Superseding Indictment ("Indictment") ¶ 2, Sept. 21, 2016, Docket No. 215.) A majority of Starkey was privately owned by William F. Austin, who served as CEO, Chairman, and sole member of the Board of Directors. (Id. ¶ 3.)1 Starkey was the primary U.S.-based customer of Sonion A.S. ("Sonion"), a Denmark corporation that manufactured and sold hearing-aid components. (Id. ¶ 6.)
Defendants were employees of Starkey and Sonion. Defendant Jerome Ruzicka was the President of Starkey, entrusted by Austin with the management of Starkey's operations. (Id. ¶¶ 7, 12.) Defendant Scott Nelson was the Chief Financial Officer of Starkey. (Id. ¶ 8.) Defendant Lawrence Miller was Senior Vice President of Human Resources of Starkey. (Id. ¶ 9.) Defendant Lawrence Hagen was an employee of Starkey. (Id. ¶ 11.) Defendant William Jeffrey Taylor was President of Sonion U.S. - the U.S. subsidiary of Sonion A.S. (Id. ¶ 10.)
Defendants are alleged to have conspired to embezzle and misappropriate money and business opportunities from Starkey and Sonion worth at least $20,000,000. (Id. ¶ 64.)
Sometime during or before 2006, Ruzicka and Taylor founded Archer Consulting, Inc. (Id. ¶ 20.) Ruzicka allegedly caused Starkey to begin paying Archer Consulting a commission on sales of hearing-aid components from Sonion to Starkey, without Austin's knowledge. (Id. ¶ 22.) Taylor submitted invoices to Starkey for commission payments, which Ruzicka approved. (Id. ¶ 23.) After receiving payment from Starkey, Taylor and Ruzicka allegedly split the proceeds. (Id. ¶¶ 23, 25.) In 2010, Ruzicka and Taylor signed a Consulting Services Agreement whereby Starkey hired Archer Consulting to provide "consulting services for the purchase of transducers," including opinions on "technology, price, and delivery." (Id. ¶ 24.) Between 2006 and 2015, Ruzicka and Taylor allegedly stole $7,650,000 from Starkey using fraudulent invoices. (Id. ¶ 26.)
Sometime around 2002, Ruzicka and Hagen founded Claris Investments, which Taylor later joined as an equal member. (Id. ¶ 28.) Ruzicka, Taylor, and Hagen represented to Sonion that Claris was owned and controlled by Starkey to obtain Starkey's discounted pricing on hearing-aid components. (Id. ¶ 27.) Taylor arranged for Sonion to sell these discounted components to other hearing-aid manufacturers. (Id.¶ 29.) Claris then invoiced these manufacturers for "commissions" based on these sales. (Id.) Ruzicka, Taylor, and Hagen each allegedly received a share of proceeds from Claris. (Id.)
Similarly, in 2009, Taylor and Ruzicka founded Archer Acoustics. (Id. ¶ 31.) Taylor represented to Sonion that Archer Acoustics was affiliated with Starkey in order to take advantage of Starkey's discounted pricing on hearing-aid components. (Id. ¶ 32.) Ruzicka, Taylor, and Hagen each allegedly received a share of proceeds from Archer Acoustics, totaling approximately $600,000. (Id. ¶ 34.)
In 2002, Austin founded Northland LLC to acquire and operate hearing-aid retailers. (Id. ¶ 35.) In 2006, allegedly without Austin's approval, Ruzicka and Nelson created Northland Hearing Centers, Inc., and transferred most of Northland LLC's assets to Northland Hearing Centers. (Id. ¶ 36.) To accomplish this transfer, Ruzicka and Nelson allegedly forged Austin's signature on certain documents. (Id.) Ruzicka and Nelson issued 100,000 shares of stocks in Northland Hearing Centers, including 51,000 shares to themselves and J.L. as restricted stock. (Id. ¶ 37.) In 2013, Ruzicka and Nelson caused Northland Hearing to purchase their unvested restricted stock for approximately $15,000,000. (Id. ¶¶ 38-40.) Nelson allegedly "grossed up" the payments to ensure that Starkey would cover the collective $7,000,000 tax liability of Ruzicka, Nelson, and J.L. (Id. ¶ 40.) In 2014, Ruzicka and Nelson allegedly made additional payments tothemselves and J.L. to cover additional tax liabilities related to the stock purchase. (Id. ¶ 42.)
In July 2006, Ruzicka signed an employment agreement with Miller, guaranteeing Miller a "long-term services and loyalty bonus" of $50,000 each year from 2006 to 2015. (Id. ¶ 45.) In total, Miller received $88,250 in "loyalty" bonuses from 2006 to 2015, exceeding the allotted $50,000 per year. (Id.)
Under Ruzicka's 2006 employment agreement, Ruzicka was eligible to receive a bonus of $250,000 in any year in which Starkey grew by more than 10%. (Id. ¶ 49.) In 2015, Ruzicka allegedly sent Miller a falsified profit and loss statement, requesting that Miller process a bonus for Ruzicka in the amount of $250,000. (Id. ¶ 50.) Additionally, it is alleged that Ruzicka's bonus was "grossed up" by an additional $140,000 to cover Ruzicka's tax liability, even though the employment contract did not call for such an adjustment. (Id. ¶ 51.)
In 2014, Nelson had Starkey's accounting department issue a $200,000 check to an Edward Jones account owned by Ruzicka. (Id. ¶ 59.) Nelson recorded the payment as an "insurance" expense but Ruzicka used the money to pay his personal state and federal income taxes. (Id.) Neither Nelson nor Ruzicka recorded the $200,000 payment as compensation to Ruzicka. (Id. ¶ 60.)
In 2010, Starkey purchased a 2011 Jaguar vehicle for $119,188.77 for Ruzicka's use. (Id. ¶ 62.) Starkey paid the fees, insurance premiums, and other costs associatedwith the Jaguar from 2010 to 2015. (Id.) In July 2015, Ruzicka transferred ownership of the Jaguar from Starkey to himself without paying Starkey for the vehicle. (Id. ¶ 63.)
To conceal bonus payments and other benefits, Miller, Ruzicka, and Nelson allegedly manipulated Starkey's descending gross payroll reports. (Id. at ¶¶ 46-48.)
Defendants have been charged with various counts of Conspiracy to Commit Mail Fraud and Wire Fraud (18 U.S.C. § 1349), Mail Fraud (18 U.S.C. § 1341), Wire Fraud (18 U.S.C. § 1343), Transactions Involving Fraudulent Proceeds (18 U.S.C. § 1957), and Making and Submitting a False Return (26 U.S.C. §7206(1)). All five defendants initially pleaded not guilty. On December 19, 2017, pursuant to a plea agreement, Nelson changed his plea to guilty to one count of Conspiracy in violation of 18 U.S.C. § 371. (Nelson Plea Hr'g, Dec. 19, 2017, Docket No. 264; Nelson Plea Agreement, Dec. 19, 2017, Docket No. 266.)
On May 19, 2017, the Court issued an order denying Brady requests for materials held by Starkey and its private investigator, Waypoint, because the Court does not have authority to order the Government to seek an ex parte order for additional materials. (Order ("Brady Order"), May 19, 2017, Docket No. 162.)
The Court must decide whether to permit the introduction of evidence of interrelated conduct not explicitly mentioned in the Indictment - particularly conduct involving Soundpoint Audiology and Hearing Services LLC ("Soundpoint"), Audiometrix LCC, and Hearing Fusion. (Gov. Trial Mem. & Mots. in Limine ("Gov. MILs") at 20-21, Dec. 14, 2017, Docket No. 244.) Defendants argue that this evidence is barred by (1) Rule 404 and (2) their Sixth Amendment constitutional rights. (Ruzicka's Resp. to Gov. MILs ("Ruzicka Resp.") at 1-7, Dec. 21, 2017, Docket No. 270.)
Rule 404(b)(1) states, "Evidence of a crime, wrong, or other act is not admissible to prove a person's character in order to show that on a particular occasion the person acted in accordance with the character." But Rule 404(b) does not "bar evidence that completes the story of the crime or explains the relationship of the parties" or intrinsic evidence of "crimes or acts which are 'inextricably intertwined' with the charged crime." United States v. Aldridge, 561 F.3d 759, 766 (8th Cir. 2009) (quoting United States v. Adams, 401 F.3d 886, 899 (8th Cir. 2005)). As the Eighth Circuit has elaborated:
[W]here evidence of other crimes is 'so blended or connected, with the one[s] on trial as that proof of one incidentally involves the other[s]; or explains the circumstances; or tends logically to prove any element of the crime charged,' it is admissible as an integral part of the immediate context of the crime charged. When the other crimes evidence is sointegrated, it is not extrinsic and therefore not governed by Rule 404(b).
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