United States v. Ruzicka

          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, for plaintiff.

          John C. Conard, JOHN C. CONARD PLLC, for defendant Jerome C. Ruzicka.

          Casey T. Rundquist and William J. Mauzy, MAUZY LAW PA, for defendant W. Jeffrey Taylor.

          Paul C. Engh, for defendant Lawrence W. Miller.

          Kevin J. Short, for defendant Lawrence T. Hagen.

          MEMORANDUM OPINION AND ORDER

          JOHN R. TUNHEIM Chief Judge United States District Court

         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.

         BACKGROUND

         I. FACTUAL ALLEGATIONS

         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.)

         A. Archer Consulting

         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.)

         B. Claris Investments and Archer Acoustics

          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.)

         C. Northland Hearing

         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 to themselves and J.L. to cover additional tax liabilities related to the stock purchase. (Id. ¶ 42.)

         D. Other Allegations

         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 associated with 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.)

         II. PROCEDURAL BACKGROUND

         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.)

         DISCUSSION

         I. GOVERNMENT'S MOTION

         A. Soundpoint, Audiometrix, and Hearing Fusion

          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 (8^th Cir. 2009) (quoting United States v. Adams, 401 F.3d 886, 899 (8^th 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 so integrated, it is not extrinsic and therefore not governed by Rule 404(b).

United States v. Phelps, 168 F.3d 1048, 1057-58 (8^th Cir. 1999) (alterations in original) (quoting United States v. Swinton, 75 F.3d 374, 378 (8^th Cir. 1996)).

         The United States claims that Ruzicka and Hagen co-owned Soundpoint, which was purchased by Starkey for $850, 000. (Gov. MILs at 15-16.) Ruzicka allegedly received $230, 000 from the sale but reported on his 2010 tax return that he only received $100, 000. Count 27 of the indictment alleges that Ruzicka provided materially false information on his 2010 tax return. (Indictment ¶¶ 71-72.) In Aldridge, the Eighth Circuit concluded that evidence of a pyramid scheme was admissible because the scheme was “inextricably intertwined” with the filing of false tax returns. 561 F.3d at 766. The Court finds Aldridge to be instructive and concludes that Ruzicka's dealings with Soundpoint are intertwined with the charge of filing a false tax return.

         The United States claims that Ruzicka used his position as Starkey's president to obtain consulting fees from Audiometrix and Hearing Fusion. (Gov. MILs at 18.) Although the alleged fraud stemming from Audiometrix and Hearing Fusion is not contained within the Indictment, the Court finds this fraud substantially similar to the fraudulent acts actually alleged. The Eighth Circuit's decision in United States v. Holliman is analogous. 291 F.3d 498 (8^th Cir. 2002). In Holliman, the indictment alleged that the defendant had stolen thirteen vehicles, and the defendant was ultimately convicted of conspiracy to transport stolen vehicles in interstate commerce. Id. at 500-01. The district court admitted evidence that he had stolen other vehicles during the conspiracy beyond the thirteen alleged in the indictment. Id. at 501-02. The Eighth Circuit held that the evidence “did not concern ‘other crimes, wrongs, or acts' under Rule 404(b), ” but was “admissible under the doctrine of res gestae, as this evidence was sufficiently connected to the charged crimes that it tended logically to prove elements of these crimes.” Id. at 501-02 (citing United States v. Riebold, 135 F.3d 1226, 1229 (8^thCir. 1998)). Like the additional vehicles in Holliman, the Court finds that evidence of Ruzicka's scheme with respect to Audiometrix and Hearing Fusion is sufficiently connected to the crime of Conspiracy to Commit Mail Fraud and Wire Fraud.

         The Court must also decide whether the admission of this evidence would run afoul of Defendants' Sixth Amendment rights “to be informed of the nature and cause of the accusation” against them. The Indictment makes no mention of Soundpoint, Audiometrix, or Hearing Fusion. “An indictment is sufficient if it contains the elements of the offense charged, lets the defendant know what he needs to do to defend himself, and would allow him to plead a former acquittal or conviction if he were charged with a similar offense.” United States v. Whitlow, 815 F.3d 430, 433 (8^th Cir. 2016). “Usually an indictment that tracks the statutory language is sufficient.” Id. The Court concludes that the indictment meets these threshold Sixth Amendment requirements. See id.

         The Court will therefore grant the Government's motion to permit the introduction of evidence of interrelated fraudulent conduct. Correspondingly, the Court will deny Ruzicka's motion to exclude evidence of Hearing Fusion. (Ruzicka's Mot. in Limine (“Ruzicka MILs”) at 30-32, Dec. 14, 2017, Docket No. 250.)

         B. Austin and Sawalich

         The Court must decide whether to exclude certain evidence about Austin and Brandon Sawalich's conduct. (Gov. MILs at 21-24.)

         1. Harassment

         The Court must decide whether to exclude impeachment evidence that female employees were awarded bonuses, employment contracts, compensation packages, or insurance contracts, to quell harassment complaints against Austin and Sawalich. The Court cannot ascertain the relevance of this evidence without first viewing it. The Court will order Defendants to produce the evidence related to harassment for the Court's in camera review.

         2. Austin's Divorce Settlement

         The Court must decide whether to exclude evidence related to Austin's divorce settlement.^[2] The Court cannot ascertain the relevance of this evidence without first viewing it. The Court will order Defendants to produce the evidence related to the settlement for the Court's in camera review.

         3. Donated Hearing Aids

         The Court must decide whether to exclude evidence that the Starkey Foundation provided defective hearing aids to impoverished individuals in other countries. The Court cannot ascertain the relevance of this evidence without first viewing it. The Court will order Defendants to produce evidence related to the donated hearing aids for the Court's in camera review.

         4. Austin's Statements

         The Court must decide whether to exclude two statements made by Austin. First, Austin allegedly said, “The only mistake that the Nazis made was keeping records.” (Gov. MILs at 22.) While the Court acknowledges that this statement contains some probative value about Austin's views on recordkeeping, the Court finds that this probative value is outweighed by unfair prejudice resulting from the outrageously anti-Semitic nature of the comment. See Fed. R. Evid. 403. Of course, Defendants are otherwise permitted to question witnesses about Austin's views on recordkeeping.

         Second, Austin allegedly said, “Everyone deserves a good f[uc]king once in a while.” (Gov. MILs at 22.) Defendants have not explained why this statement is probative, and the Court cannot ascertain to what issue it relates. Nevertheless, the Court concludes that this statement is highly prejudicial despite whatever probative value it may have. See Fed. R. Evid. 403.

         Accordingly, the Court will grant the Government's motions to exclude both of these statements made by Austin.

         5. Austin's Mental State

         The Court must decide whether to exclude evidence that Austin believed that he had one or more conversations with wildlife, angels, or other ethereal beings. “[A] tendency to hallucinate is so like a direct physical impairment [to the witness's perception] as to fall well within the old-fashioned rule, ” and therefore “a court must not keep such evidence from the jury.” United States v. Pryce, 938 F.2d 1343, 1346 (D.C. Cir. 1991). The Government argues that these are not hallucinations but rather religious beliefs and are inadmissible as impeachment evidence. See Fed. R. Evid. 610. The Government has stretched the definition of “religious beliefs” further than it may go. Not all of these purported hallucinations relate to religious beliefs. For example, Defendants claim that “Austin has told multiple people that he has had back-and-forth conversations in English with deer that he shot dead while hunting.” (Ruzicka Resp. at 4.) The Court finds that the evidence the Government seeks to exclude is not prohibited by Rule 610. The Court will therefore deny the Government's motion to exclude evidence of Austin's discussions with wildlife, angels, or other ethereal beings.

         C. Statements By Non-Testifying Witnesses

         The Court must decide whether to permit the introduction of e-mails and documents from non-testifying witnesses “to demonstrate the effect of those communications on the particular defendant involved in the communication, to provide context for the defendant's responses, and to show the defendant's knowledge, intent, and lack of mistake.” (Gov. MILs at 25.) Generally, e-mails sent by non-testifying witnesses are not hearsay so long as the statements are not offered for the truth of the matter asserted. See, e.g., United States v. Cooke, 675 F.3d 1153, 1156 (8^th Cir. 2012). The Government, however, has not provided any such e-mails or documents to the Court, so the Court cannot evaluate whether these statements (1) are relevant, (2) are ...