Lawsuit By Former Finance Director Cites American Apparel for Financial Misdeeds and Discrimination

LABOR PROBLEMS: Nativo Lopez of Hermandad Mexicana speaks at a press conference where fired American Apparel workers talked about losing their jobs right before Easter.

LABOR PROBLEMS: Nativo Lopez of Hermandad Mexicana speaks at a press conference where fired American Apparel workers talked about losing their jobs right before Easter.

As of Thursday, April 23, 2015

A lawsuit charging an American Apparel executive with religious discrimination and financial malfeasance reads like a page from a Machiavelli novel.

David Nisenbaum, the fired director of manufacturing accounting analysis and audit at American Apparel, filed a lawsuit in Los Angeles County Superior Court on April 20 against his former employer. He maintains he was wrongfully fired because he allegedly dug up financial irregularities on John Luttrell, the chief finaancial officer of the company at the time Dov Charney was still the president and chief executive.

After Charney was ousted last June, Luttrell went on to become the interim CEO until he left in September. Nisenbaum reveals in legal papers that Charney tried to have Luttrell fired several times but was overruled by the board of directors every time.

American Apparel said through a spokesperson that the company doesn’t “comment on personnel matters, especially those that precede the current management team.”

In his lawsuit, Nisenbaum claimed that Luttrell’s mismanagement of a bond financing program in April 2013 cost the company millions of dollars.

Nisenbaum said the chief financial officer promised that the bond financing would bring in $220 million but ended up funding under $200 million. “Interest rates and other economic terms of the bond were inferior to what the chief financial officer promised,” the lawsuit said. Nisenbaum said he “discovered that the chief financial officer failed to disclose the specific terms and negotiations of the bond” to both Charney and the board of directors.

Additionally, the lawsuit alleges that Luttrell paid one particular investment banker $1.5 million in “promotion fees” after the bond was funded.

Nisenbaum also firmly blames Luttrell for launching plans to build a new distribution center in La Mirada, Calif., that had some missteps before it began running efficiently.

From early 2012 to the end of 2013, court papers said, Luttrell embarked on a distribution-center project despite Charney’s objection because the CEO felt the company was still in a precarious financial situation. Also, Charney wanted the distribution center built in downtown Los Angeles and not La Mirada, legal papers said.

Nisenbaum said he predicted the new warehouse would lose millions of dollars. In the end, he and Charney had to spend 100 days stabilizing the new distribution center and turning it around because they feared the distribution center’s losses would force the company into bankruptcy.

Nisenbaum also maintained that Luttrell failed to reveal a $4.4 million customs-overpayment problem in Germany because improper paperwork was filed.

Nisenbaum said he uncovered a Feb. 14, 2014, memo Luttrell sent to the board’s auditing committee saying that the way to solve American Apparel’s financial woes was to get rid of Charney, appoint an interim CEO and sell the company. “Mr. Luttrell then proceeded to dilute Mr. Charney’s ownership of the company [by issuing more stock to raise money] rather than engage in more debt and equity financing to resolve the deficiencies he created,” the lawsuit said.

Nisenbaum maintained in court papers that Luttrell wanted to sell the company so “he could retire and cover up his violations of Sarbanes-Oxley [Act] and fraud in running a publicly traded company.”

In addition, the former American Apparel financial director, who was hired in November 2012, said he was discriminated against by Luttrell for being Jewish.

Nisenbaum, who wore religious clothing and a yarmulke, said he was told by a coworker on June 18, 2014, (the same day that Charney was suspended from his job while an internal investigation was conducted) that Luttrell made derogatory comments about Nisenbaum’s religious affiliation. Nisenbaum said he filed a complaint with Jacqueline Madrigal, American Apparel’s director of human resources, noting that he feared he was being targeted because of his religion.

Six days later, he was called into a meeting with two American Apparel attorneys to discuss his discrimination complaint, court documents said. According to the lawsuit, the attorneys told Nisenbaum he was “mistaken about Mr. Luttrell’s motives.” At the end of the meeting, the lawsuit said, Nisenbaum was handed a termination letter and told that June 24 was his last day.

Nisenbaum’s lawsuit, filed by attorney Keith Fink, was followed by a lawsuit by American Apparel shareholders Jan Hubner, a former director of visual merchandising at American Apparel who owns nearly 40,000 shares, and Eric Ribner, Charney’s freshman-year roommate at Tufts University, who owns 3,000 shares. They claim in their lawsuit, filed April 21 in U.S. District Court in Los Angeles, that the apparel company and several board members violated federal securities law and breached their fiduciary duties.

Hubner and Ribner maintained that proxy statements sent out last April to re-elect American Apparel board members were deceptive because their statements to voters said they supported keeping Charney in his job when in fact they were plotting his ouster.

The lawsuit maintains that American Apparel “had a duty to disseminate in the company’s proxy statement accurate and truthful information and to correct any previously issued statements that they learned were materially misleading or untrue.”

Following the company’s annual shareholder meeting in New York on June 18, Charney met with the board and was told he was being suspended from his chief executive position pending an internal investigation into breach of fiduciary duty and violating company policy. Charney was terminated from his job on Dec. 16.

Named as defendants in the shareholder lawsuit were past and present board members Allan Mayer, David Danziger, Robert Greene, Marvin Ingelman and William Mauer as well as American Apparel.

A spokesman for American Apparel said, “These claims are completely baseless, and we are confident we will succeed on each and every one of these.”

These two lawsuits come on the heels of a class-action lawsuit filed in U.S. District Court on April 16 by three fired employees who worked in production. Fink also represents the three fired employees.

The fired employees maintain they were not given enough legal notice or severance pay before they were dismissed.

Carlos Hirschberg, Cesar Antonio Palma Cordero and Dominga Valencia, among some 200 American Apparel workers fired in early April, maintain that American Apparel violated the federal and state Worker Adjustment and Retraining Notification Act (WARN), which stipulates that employers give their workers 60 days legal notice before there are mass layoffs.

“These claims are absolutely without merit,” an American Apparel spokesperson said. “Workers’ rights and respect for our employees are core principles of American Apparel. This is clear from our code of business conduct and ethics, which reflects our efforts to ensure that American Apparel’s workplaces are free from harassment, bullying and intimidation and which promotes fair treatment of employees and compliance with labor and employment laws. We are dedicated to a culture of free speech and social commentary.”

In court papers, the former workers maintain that management duped a number of employees into signing separation agreements releasing any and all claims against the company, including claims for severance pay.

In a press conference held April 21 in front of American Apparel’s huge factory in downtown Los Angeles, the fired workers talked about their dismissals. “It is not fair what they have done to us,” Dominga Valencia said, noting she was told she had to sign a release immediately in order to get her severance. “I tell my colleagues to defend themselves.”

American Apparel presented these separation agreements to employees under duress and under procedurally unconscionable terms, the lawsuit claims. As American Apparel’s management was well aware, many of these employees did not read or write at all, the lawsuit said. “None of these employees were attorneys, nor were they given the opportunity to consult counsel’s assistance with these agreements.”

The dismissed workers are asking for compensatory damages equal to at least the amounts provided by the federal and state WARN Act as well as attorneys’ fees.

Meanwhile, hundreds of American Apparel workers have signed cards stating they wish to form a union, said Nativo Lopez, a senior adviser with Hermandad Mexicana, a nonprofit immigrant rights group that has been working with terminated workers to see if retaliation charges should be filed with the National Labor Relations Board against American Apparel.

“There are quite a few who have signed cards,” said Lopez, who would not give a specific amount but said more than 1,000 people have signed up. There are 2,800 production workers at the huge clothing factory in downtown Los Angeles. “The workers themselves are self organizing and collecting the cards for the most part.”

All this turmoil comes as four workers did file grievances on April 15 with the National Labor Relations Board. American Apparel employees Savino Rubio, Savino Refugio, Marina Cuellar and Richard Krehl said basically the company violated the National Labor Relations Act by interfering with workers’ rights to talk with union organizers. A fifth employee, Carlos Cuevas, filed a complaint with the NLRB on April 16.

Unionization efforts, worker layoffs and the lawsuit all come after American Apparel founder Dov Charney was fired. He was replaced with veteran apparel executive Paula Schneider.