United States District Court, D. Minnesota
J. Foster, FREDRIKSON & BYRON, P.A., for William F.
MacDonald, United States Attorney, and Benjamin F. Langner,
Lola Velazquez-Aguilu, and Surya Saxena, Assistant United
States Attorneys, for plaintiff.
C. Conard, JOHN C. CONARD PLLC, for defendant Jerome C.
T. Rundquist and William J. Mauzy, MAUZY LAW PA, for
defendant W. Jeffrey Taylor.
R. TUNHEIM CHIEF JUDGE
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
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.
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.)
about 2005 until 2006, Northland US, LLC (“Northland
US”), acquired and operated hearing-aid
retailers. (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.
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.)
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.
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.
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.)
- 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.)
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).
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).
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,  and, therefore, the Eighth Circuit's
MVRA and VWPA caselaw is relevant to the Court's
interpretation of the CVRA.
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.
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.”
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).
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
COMMISSION OF A FEDERAL OFFENSE
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.”
2006 Northland U.S. Asset Transfer
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.
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.
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.)
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.
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.
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
2006 Northland Hearing Issuance of Restricted Stock
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
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
Q. You . . . w[e]nt to [Austin's] Beach Road house, and
you talked to him about the move to Northland Hearing
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 ...