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United States v. Ruzicka

United States District Court, D. Minnesota

August 1, 2018

UNITED STATES OF AMERICA, Plaintiff,
v.
JEROME C. RUZICKA and W. JEFFREY TAYLOR, Defendants.

          Dulce J. Foster, FREDRIKSON & BYRON, P.A., for William F. Austin.

          Erica MacDonald, United States Attorney, and Benjamin F. Langner, Lola Velazquez-Aguilu, and Surya Saxena, Assistant United States Attorneys, 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.

          ORDER

          JOHN R. TUNHEIM CHIEF JUDGE

         On April 6, 2018, William F. Austin requested permission to file a motion under the Crime Victims' Rights Act (“CVRA”). The Court ordered Austin to show cause and submit a brief as to why Austin is a “crime victim” within the meaning of the Act. Now, Austin and Starkey Laboratories, Inc. (“Starkey”), have filed a joint brief regarding their statuses as crime victims.

         The only issue before the Court in this motion is the question of whether Austin and/or Starkey are “crime victims” under the CVRA. The Court will conclude that Starkey is a victim and may file a motion under the CVRA. However, the Court will conclude that Austin is not a victim entitled to file a motion under the CVRA because any harm he suffered was not caused by the alleged criminal conduct.

         BACKGROUND

         I. FACTUAL BACKGROUND

         Starkey is a Minnesota S Corporation that develops, manufactures, and distributes hearing aids. (3d Superseding Indictment (“Indictment”) ¶ 2, Jan. 8, 2018, Docket No. 298.) Starkey is privately owned by Austin and Starkey employees. (Id. ¶ 3.) Starkey employees hold shares under an Employee Stock Option Program (“ESOP”), which is managed by a trust. (Austin Ex. List, Ex. H (“Chartwell Report 2013”) at 5, May. 3, 2018, Docket No. 458-8.) On December 31, 2013, Austin held 93.6% of Starkey's outstanding shares and the ESOP held the remaining 6.4%. (Id.) During the relevant time period, Austin served as Starkey's CEO and Chairman of the Board of Directors. (Indictment ¶ 3.)

         From about 2005 until 2006, Northland US, LLC (“Northland US”), acquired and operated hearing-aid retailers.[1] (Indictment ¶ 35.) Northland U.S. was wholly owned by Austin. (Austin Ex. List, Ex. A (“Grimes Memo”) at 2, May 3, 2018, Docket No. 458-1.) On August 31, 2006, Northland US's assets and liabilities were transferred to Northland Hearing Centers, Inc. (“Northland Hearing”), and Starkey paid $5.3 million for 49% of Northland Hearing's shares in the form of loan forgiveness. (Indictment ¶ 36; Ruzicka Ex. 1 (“Chartwell Report 2008”) at 2, June 1, 2018, Docket No. 479-1; see Grimes Memo at 2.) At the same time, Northland Hearing issued the remaining 51% of shares in the form of restricted stock to Jerry Ruzicka, Scott Nelson, and Jeffrey Longtain, which was scheduled to vest in 2016. (Indictment ¶ 37.) It is disputed whether Austin knew about (1) the transfer of assets from Northland U.S. to Northland Hearing and (2) the issuance of restricted stock to Ruzicka, Nelson, and Longtain.

         In 2013, Ruzicka allegedly caused Northland Hearing to terminate the unvested restricted stock for approximately $8, 200, 000 without Austin's knowledge or approval. (Indictment ¶¶ 38-39.) Ruzicka later “grossed up” the payments by an additional $7, 000, 000 to cover to income taxes. (Id. ¶¶ 40, 42.) These payments were booked to Northland Hearing rather than Starkey. (Id. ¶ 41.)

         Ruzicka was indicted - along with four co-conspirators - in connection with the alleged embezzlement of funds from Starkey. Count 1 alleges, in part, that Ruzicka engaged in a conspiracy to commit mail fraud and wire fraud by (1) issuing restricted stock in Northland Hearing without Austin's knowledge in 2006 and (2) redeeming that restricted stock without Austin's knowledge in 2013. (Id. ¶¶ 35-43.) Counts 2 and 3 allege that Ruzicka committed mail fraud by sending checks “representing [the] proceeds of the Northland restricted transaction” through the mail. (Id. ¶ 58.) Count 10 alleges that Ruzicka committed wire fraud by processing a check of $2, 900, 000 from Starkey's bank account to Ruzicka's investment account in August 2013. (Id. ¶ 60.) The jury returned a not-guilty verdict for Ruzicka with respect to the conspiracy count and a guilty verdict for Ruzicka with respect to the counts of mail and wire fraud stemming from the Northland transaction. (Ruzicka Verdict (“Verdict”) at 1-2, Mar. 8, 2018, Docket No. 417.)

         II. PROCEDURAL BACKGROUND

         On February 27, 2018, the Court concluded that the United States had knowledge about two instances of false testimony - (1) whether Austin told FBI agents in an interview that he shreds documents and (2) whether, in a single day, Ruzicka drafted an amended employment contract that was signed. (Napue Order at 6-15, Feb. 27, 2018, Docket No. 377.) The Court concluded that the United States' failure to correct these false statements would result in a constitutional violation. See Napue v. Illinois, 360 U.S. 264, 269 (1959). To avoid the violation, the Government called back two FBI agents for further testimony. In light of this testimony, the Court found that Austin had provided false testimony and struck his false statements. (Napue Remedy Order at 2, Mar. 5, 2018, Docket No. 391.) On March 5, the Court issued an order finding that the United States had remedied the Napue violation. (Id.)

         Following trial, Austin filed a letter with the Court requesting permission to file a CVRA motion to clarify the Court's February 27 order. (Letter at 1, Apr. 6, 2018, Docket No. 431.) In particular, Austin cited the provision of the CVRA that affords crime victims “[t]he right to be treated with fairness and with respect for the victim's dignity and privacy.” 18 U.S.C. § 3771(a)(8). The Court ordered Austin to file a brief explaining why he is a “crime victim” under the CVRA. (Order, Apr. 6, 2018, Docket No. 432.)

         Austin - now joined by Starkey - has filed a brief arguing that he is a victim because he was harmed as a result of the 2006 and 2013 Northland transactions. (Austin Br., May 3, 2018, Docket No. 457.) The United States and Ruzicka both filed responses, the United States in support and Ruzicka in opposition. (Ruzicka Br., June 1, 2018, Docket No. 479; U.S. Br., June 1, 2018, Docket No. 478.)

         DISCUSSION

         The CVRA protects certain rights for crime victims, including “[t]he right to be treated with fairness and with respect for the victim's dignity and privacy” and the right to restitution as provided in law. 18 U.S.C. § 3771(a). The victim may file a motion to assert his or her rights with the district court where the defendant is being prosecuted or, when no prosecution is underway, in the district where the crime occurred. Id. at (d)(3).

         The CVRA defines “crime victim” as “a person directly and proximately harmed as a result of the commission of a Federal offense or an offense in the District of Columbia.” Id. at (e)(2).[2]

         The Eighth Circuit has not had an opportunity to review what it means for an individual to be “directly and proximately harmed as a result of the commission of a federal offense” under the CVRA. Other courts have examined this issue, and the Court finds the resulting cases instructive. Additionally, the definition of “crime victim” in the CVRA was drawn from the Mandatory Victims Restitution Act (“MVRA”) and the Victim Witness Protection Act (“VWPA”). See Paul G. Cassell, Recognizing Victims in the Federal Rules of Criminal Procedure: Proposed Amendments in Light of the Crime Victims' Rights Act, 2005 B.Y.U. L. Rev. 835, 857 (2005). Courts have interpreted the CVRA in light of the MVRA and the VWPA, [3] and, therefore, the Eighth Circuit's MVRA and VWPA caselaw is relevant to the Court's interpretation of the CVRA.

         The Eleventh Circuit has held that the determination of whether an individual is a victim for purposes of the CVRA is a mixed question of law and fact. In re Stewart, 552 F.3d 1285, 1288 (11th Cir. 2008). In the restitution context, judicial factfinding is appropriate to determine the scope and victims of criminal conduct. See United States v. Thunderhawk, 799 F.3d 1203, 1209 (8th Cir. 2015). Courts use a two-step process for determining whether an individual is a victim under the CVRA: First, the Court “identif[ies] the behavior constituting ‘commission of a Federal offense.'” Stewart, 552 F.3d at 1288 (quoting 18 U.S.C. § 3771(e)). Second, the Court “identif[ies] the direct and proximate effects of that behavior on parties other than the United States.” Id.

         First, the Court must identify the behavior constituting commission of the offense. The “commission of the federal offense” may be broader than the conviction itself. See United States v. Chalupnik, 514 F.3d 748, 753-54 (8th Cir. 2008) (MVRA). Accordingly, the Court concludes that it can look to the underlying course of conduct that led to the offense to determine the scope of the “commission of the federal offense.”

         Second, the Court must determine whether the victims were directly and proximately harmed by the commission of the federal offense. “The CVRA . . . does not limit the class of crime victims to those whose identity constitutes an element of the offense or who happen to be identified in the charging document.” Stewart, 552 F.3d at 1289. In other words, “a party may qualify as a victim, even though it may not have been the target of the crime, as long as it suffers harm as a result of the crime's commission.” Id.; see also Moore v. United States, 178 F.3d 994, 1001 (8th Cir. 1999) (holding that a bystander of a bank robbery was a victim under the MVRA).

         “A person is directly harmed by the commission of a federal offense where that offense is a but-for cause of the harm.” In re Fisher, 640 F.3d 645, 648 (5th Cir. 2011). To be “direct” harm, “the harm to the victim [must] be closely related to the conduct inherent to the offense, rather than merely tangentially linked”; the harm cannot be ancillary to the defendant's conduct. In re McNulty, 597 F.3d 344, 352 (6th Cir. 2010). “A person is proximately harmed when the harm is a reasonably foreseeable consequence of the criminal conduct.” Fisher, 640 F.3d at 648. A proximate-cause requirement “preclude[s] liability in situations where the causal link between conduct and result is so attenuated that the consequence is more aptly described as mere fortuity.” Paroline v. United States, 134 S.Ct. 1710, 1719 (2014).

         I. COMMISSION OF A FEDERAL OFFENSE

         The Court must first identify the behavior that constitutes the commission of a federal offense. Austin and Starkey limit their brief to the events surrounding Northland U.S. and Northland Hearing: (1) the 2006 transfer of Northland US's assets to Northland Hearing, (2) the 2006 issuance of restricted stock to Ruzicka, Nelson, and Longtain, and (3) the 2013 payments for termination of the restricted stock and grossing-up of the proceeds to cover tax liabilities. The primary question for the Court is whether Austin knew about these transactions. If Austin knew of and condoned a particular transaction, the Court cannot find that the action was committed with intent to defraud Starkey. The Court will conclude that Austin knew about the 2006 transfer of Northland US's assets to Northland Hearing and the 2006 issuance of restricted stock to Ruzicka, Nelson, and Longtain. However, the Court will conclude that the 2013 restricted-stock transaction and grossing-up of the proceeds was the “commission of a federal offense.”

         A. 2006 Northland U.S. Asset Transfer

         The Court must decide whether the 2006 transfer of Northland US's assets to Northland Hearing constituted behavior during the commission of a federal offense. The Court will find that Austin knew about the asset transfer and, therefore, will conclude that the 2006 asset transfer was not a fraudulent transaction constituting part of the commission of a federal offense.

         The jury made no affirmative findings with respect to the 2006 Northland transactions. The jury did not need to find any facts with respect to the 2006 asset transfer or issuance of restricted stock to convict Ruzicka of mail or wire fraud for the 2013 transaction. The only count in the Indictment that necessarily involved the 2006 Northland transactions was the conspiracy count. (Indictment ¶¶ 35-37.) The jury returned a not guilty verdict with respect to conspiracy. (Ruzicka Verdict at 1.) The Court cannot ascertain whether the jury believed that the 2006 transactions were fraudulent. The Court must consider the evidence presented at trial to determine whether the commission of the federal offense includes the 2006 asset transfer and issuance of restricted stock. Cf. Thunderhawk, 799 F.3d at 1209.

         Around 2006, it became clear to Starkey's Finance Department that the retail-location assets should be separated from Northland US. According to Nelson's trial testimony, Northland U.S. purchased retail locations using loan funds received from Starkey. (Trial Tr. Vol. XVII at 4160:9-25, July 13, 2018, Docket No. 511.) However, this loan arrangement between Starkey and Northland U.S. potentially ran afoul of agreements between Starkey and Wells Fargo. (Id. at 4161:1-15, 4162:10-21.) Starkey also had business reasons to separate the retail assets from Northland US. (Trial Tr. Vol. XVIII at 4403:1-4406:5, July 17, 2018, Docket No. 525.) To resolve this issue, Starkey created Northland Hearing. (Trial Tr. Vol. XVII at 4163:14-22.)

         Nelson signed Austin's name on documents relevant to the asset transfer. (Id. at 4171:1-4172:9; Trial Tr. Vol. XXVIII at 4197:19-4198:13, 4199:19-4200:23) Nelson admitted that he did not seek Austin's permission to sign the documents. (Trial Tr. Vol. XXVII at 4171:20-22.) However, Nelson testified that he believed he had authority to sign Austin's name because “Bill was aware that we were moving the stock or the company out of [Northland US] into an entity that Starkey would own.” (Id. at 4172:23-4173:21.) Nelson testified that he had a conversation with Austin about the asset transfer. (Id. at 4173:4-11.) The Court finds Nelson's testimony credible.

         Moreover, Austin is a trustee for Starkey's ESOP. (Trial Tr. Vol. XVIII at 4208:3-5.) The annual Appraisal Report for the ESOP disclosed at length:

Historically, the Company's consolidated financial statements included the operations of its variable interest entity (“VIE”), Northland, US, LLC. However, on August 31, 2006, the majority of the assets and liabilities of the VIE were acquired by Northland Hearing Center, Inc. (“NHC”), for which the Company is the primary beneficiary. As a result, Starkey's financials were consolidated with NHC since 2006.

(See Ruzicka Br., Ex. 1 at 3, June 1, 2018, Docket No. 479-1.) The Court acknowledges that this disclosure was made after the 2006 asset transfer and that Nelson generally did not review the report with Austin. (See Trial Tr. Vol. XVIII at 4208:6-24.) However, the Court finds it relevant as evidence that Ruzicka did not seek to conceal the asset transfer from Austin.

         The Court finds that Austin knew about the asset transfer. Accordingly, the Court concludes that the asset transfer does not constitute behavior during the commission of a federal offense.

         B. 2006 Northland Hearing Issuance of Restricted Stock

         The Court must decide whether the 2006 issuance of restricted stock constituted behavior during the commission of a federal offense. The Court will find that Austin knew about the issuance of restricted stock and, therefore, will conclude that the issuance of restricted stock was not a fraudulent transaction constituting part of the commission of a federal offense.

         Nelson testified that Ruzicka proposed giving himself, Nelson, and Longtain a “substantial portion” of the Northland Hearing's shares as a long-term incentive for their management. (Trial Vol. XVII at 4164:19-4165:22.) Nelson clearly testified that he and the auditors told Austin about the issuance of the restricted stock “at the very beginning”:

Q. You . . . w[e]nt to [Austin's] Beach Road house, and you talked to him about the move to Northland Hearing Centers, Inc.?
A. I did talk with him about the move, yes.
Q. And you talked to him about the restricted stock?
A. I recall I had a conversation with him about that.
Q. You had a conversation with Bill Austin in 2006 about the move to Northland Hearing Centers, Inc., and about the issuance of restricted stock?
A. I don't recall if the restricted stock was - that conversation was in 2006 exactly, but I know I had the conversation about moving it from the ...

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