American Apparel Ends Wild Ride with CEO Dov Charney

The wild ride for American Apparel founder and CEO and 27% shareholder, Dov Charney, came to an end with his termination by the public company’s Board of Directors for “cause.” Charney was suspended on June 18 due to alleged work-related sexual transgressions that resulted in skyrocketing insurance costs. Charney is going away with nice words, but this situation is sure to have lots of continuing and new litigation.

Los Angeles-based American Apparel officially announced that the Board fired Charney “for cause in accordance with the terms of his employment agreement,” according to the Los Angeles Times. The company stated that fashion industry executive Paula Schneider will officially take over as CEO on January 5, 2014. Schneider has held senior positions at retailers such as BCBG Max Azria and Laundry by Shelli Segal. The company did not name a Chair or President.

Bad publicity this summer hurt American Apparel. The company booked a $19.2 million loss for the quarter ending September 30. Sales fell by $8.6 million to $155.9 million from the prior year. Scott Brubaker, who served as consultant and crisis manager since Charney’s suspension in June, will remain as a transition consultant.

In a June termination letter obtained by Buzzfeed, Charney was blamed for American Apparel’s employment practices liability insurance retention growing from $350,000 to $1 million this year as a direct result of Charney’s actions. The Board also referred to the cost of defending numerous lawsuits and the loss of key employees due to Charney’s alleged misconduct.

When the media found out about the Board’s initial action in June American Apparel’s stock price actually rallied by about 20%. Although the Board offered Charney a choice to alternative to resign quietly and become a consultant at an annual fee of $1 million for four years, plus walk away with a hefty severance package, Charney denied any wrongdoing and described the Board’s charges as “baseless.” The Board then implemented the consulting contract without his agreement.

Some of the more egregious charges included a 2011 claim by Ms. Irene Morales in her $260 million lawsuit against Charney and the company that the 18-year-old employee was treated as a “sex slave.” Supposedly, after Ms. Morales left the company, she sent Charney nude photos of herself. It is alleged that Charney knew an American Apparel employee created a bogus blog to post the nudes and pose as Ms. Morales.

The Board stated in the termination letter that Charney had a duty to prevent such conduct and that, “Your failure to act was not in the best interest of the Company. It exposed the Company to liability and at least in once instance, directly resulted in an arbitrator finding that the Company acted with malice.”

The company also blamed Charney for using severance, bonus and commission payments as well as salary increases for personal pay-offs to prevent legal actions or suborn perjury by American Apparel staff. The Board accused Charney of misconduct for never telling disclosing the pay-offs that were legally binding against the company.

The litany of charges drones on with alleged subordination of perjury, sexual harassment, and discrimination. Charney is also accused of derogatory and disparaging remarks directed at persons based on their color, ethnicity, gender, sexual orientation or religious persuasions. The Board alleged Charney used the company’s corporate apartments and expense budget for non-business purposes with friends and family.

Charney issued a press statement to the New York Times wishing the company continued success, but was “disappointed with the circumstances.” He added, “I‘m proud of what I created at American Apparel and am confident that, as its largest shareholder, I will have a strong relationship with the company in the years ahead.”


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