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Starkey Laboratories and its ousted president traded accusations of serious improprieties on Friday, escalating a conflict that first came into public view when the hearing-aid maker abruptly fired eight top people in September.

Former President Jerry Ruzicka alleged in a whistleblower lawsuit that Starkey owner Bill Austin or his family members diverted millions in company funds for personal use, violated U.S. tax and customs laws, falsified records and sold hearing aids labeled new that were made from old components.

"Austin routinely pressured manufacturing personnel to use defective microphones and speakers, and other used or defective parts for hearing aids" sold to the company's foundation, the lawsuit said.

Starkey's attorney shot back, claiming that Ruzicka stole millions from the company.

The company, based in Eden Prairie, is one of the top hearing aid makers in the world and the only major player headquartered in the United States. It is well-known for its Starkey Foundation arm and elaborate galas that have featured former presidents and rock stars raising money to give hearing aids to poor children worldwide.

The accomplishments of both the company and foundation, however, have been overshadowed for months by Austin's firing of a big portion of his executive staff, plus several other employees, and an ensuing federal investigation.

One of the fired executives, former chief operating officer Keith Guggenberger, filed a wrongful termination lawsuit in October, alleging that a rift developed between Ruzicka and Austin over Austin's stepson, Brandon Sawalich, and what his role at the company should be.

Then in November, FBI and Internal Revenue Service agents raided Ruzicka's home, taking records, computers and a car. Agents also questioned many of the other fired and current employees.

There are no indictments to date, and Ruzicka's attorney, Marshall Tanick, has said his client — who worked at Starkey for 38 years and was president since 1998 — did nothing wrong and welcomed the investigation.

"Mr. Ruzicka maintained and continues to maintain that he did not engage in any improprieties or wrongdoing. The repeated assertions by Starkey and its representatives are false and defamatory and further injure my client," Tanick said.

Starkey's attorney, David B. Olsen, said in a statement that "we are confident that the investigation will show that Ruzicka abused the trust that was placed in him, by among other things, stealing millions of dollars from the company and its employees over a period of several years."

He declined to comment on specifics of Ruzicka's lawsuit, but said it "will succeed neither in diverting attention from his own conduct or delaying the inevitable. Nor will he succeed in again harming the company and the people he has already victimized through claims made in his civil suit."

Ruzicka's lawsuit is the second whistleblower lawsuit filed in a month against Starkey. The other, which also named the Starkey Foundation, was filed by Maria Vanessa Boys Smith, a foundation executive whose salary was funded by the company.

Smith's lawsuit said she pointed out incidents of mishandled money to other foundation executives and to Bill Austin's wife, Tani. Both whistleblower suits claim the foundation charged the company much more for hearing aids than they were worth.

In addition to claiming that the company fired Ruzicka in retaliation for exposing wrongdoing, Friday's lawsuit, filed in Hennepin County District Court, accuses the company, Austin and Sawalich, a company vice president, of defamation of character and of violating the terms of Starkey's Employee Stock Ownership Plan.

A separate breach-of-contract action was filed with the American Arbitration Association stating that Starkey violated a lucrative "deferred-compensation" contract and amendment. Ruzicka said in that complaint that his employment agreement, which would have ended this month, promised $8.7 million over the next 10 years plus a 10 percent stake in the company upon Austin's disability, death or change in ownership. He said in the lawsuit that Starkey still has not paid him the $138,000 in wages owed at the time of his termination.

Ruzicka's allegations

Among the allegations of wrongdoing Ruzicka claims in the lawsuit:

• Austin and his family failed to reimburse Starkey for personal use of the company plane.

• Sawalich used $300,000 in company funds to remodel and maintain his home. The general contractor performing the work was told to falsely indicate that the house was Starkey property.

• Sawalich kept money that was set aside for customer rebates on hearing aid orders for his personal use.

• Sawalich and his mother, Tani Austin, diverted $200,000 a month of Starkey money to another company they owned. The time frame is not specified.

• The company paid $30 million in expenses for another of Austin's stepsons, Steven Sawalich. The funds were used to produce a reality show about the Starkey Foundation's work. The show, the lawsuit said, had no commercial value and was not profitable.

• Steven Sawalich's company received $20 million in Starkey funds for the production of a movie, and the money was never repaid.

• Bill Austin was not licensed in the state of Minnesota to make ear impressions and fit hearing aids, but did so anyway, prompting patient claims for damages for $4.5 million. As a result, Starkey is unable to obtain professional liability malpractice insurance for Bill Austin, the complaint said.

"Wow. Wow. Wow!"

Reaction to the lawsuit was swift. "Wow. Wow. Wow!" said Paul Vaaler, a management and law professor for the University of Minnesota's Carlson School of Management. Vaaler, who used to defend corporations, said Starkey's defense team will likely ask the court to rule that all of Ruzicka's claims should be handled in arbitration, which tends to be friendlier to employers.

John Marti, a partner at the Dorsey & Whitney law firm who is not affiliated with the case, said that it is not unusual to have a lawsuit filed when there is a known federal investigation going on.

Should indictments land as a result of the federal investigation, Marti said, it would not be unusual for a lawsuit and a criminal case to travel through the courts in tandem.

Dee DePass • 612-673-7725