Legal Action Between Dov Charney and American Apparel Heats Up

Legal papers recently filed by American Apparel’s chairwoman against the company’s former chief executive should get an X-rating warning.

Colleen Brown, in an anti-SLAPP motion filed June 19 in Los Angeles County Superior Court against former CEO Dov Charney, maintained that Charney was fired in December for just cause after an investigation turned up dozens of lascivious and discriminatory events.

In court papers, Brown noted that several videos and photos found on the company’s network server showed Charney having sex with employees in various locations and with models during photo shoots. “The company, as a result of Mr. Charney’s sexual liaisons, incurred $8.2 million in insured litigation costs and $1.2 million in uninsured litigation costs through September 2014,” Brown said in court documents.

“Mr. Charney repeatedly engaged in conduct that violated the company’s sexual harassment and anti-discrimination policy and engaged in conduct that repeatedly put himself in a position to be sued by numerous former employees for claims that include harassment, discrimination and assault,” legal papers noted.

In addition, according to the filing, Charney reportedly asked employees who were recipients of sexually graphic messages to delete them.

In response, Charney’s attorney, Keith Fink, said American Apparel has engaged in “an invasion of Mr. Charney’s privacy in a shameful attempt to extort him and gain leverage over him. They went through a well-protected personal photo archive that no one had access to other than Mr. Charney and looked though his private materials, which span a period of over 30 years. They went through years and years of private text messages from his personal telephone between himself and his friends, some of which involved amorous conversations that were consensual and welcome in nature.

“These private materials were exposed publicly in a desperate attempt to draw attention away from their own acts that have damaged the company’s employees—not to mention Mr. Charney himself, who spent his entire professional career building American Apparel,” Fink added.

Brown’s anti-SLAPP motion, which is meant to protect people from lawsuits of questionable merit, is in response to a May lawsuit filed by the American Apparel founder against Brown and American Apparel for defamation. The lawsuit was filed after Brown sent a letter to company employees saying that Charney would never be returning to the company.

“Many of you have expressed concern that Mr. Charney continues to claim he is returning to American Apparel. He is not,” she wrote in the letter. “Mr. Charney put in writing he wouldn’t come back, in an agreement filed with the SEC [Securities and Exchange Commission]. Mr. Charney was fired for cause as a result of two separate investigations.”

Charney, in his lawsuit, claims these statements are false and that he never agreed in writing or otherwise that he would not return to work at American Apparel.

Meanwhile, Charney has filed two more lawsuits against the company, its investors and former executives.

On June 24, the American Apparel founder filed legal documents in Los Angeles County Superior Court accusing hedge fund Standard General, former American Apparel Chief Financial Officer John Luttrell, and several current and former board members of fraud and conspiracy in their attempt to allegedly wrest control of the company away from him. He is asking for $100 million in damages.

The lawsuit stems from a secondary stock offering that reduced Charney's stock holdings from 43 percent of the company's shares to 27 percent, which meant he no longer had enough votes to overrule any decisions made by the board. Charney then partnered with Standard General to buy more stock, whose voting power is controlled by both Charney and Standard General. But Standard General allegedly has sided with the board of directors on their decisions. In June, the board voted to suspend Charney as CEO and in December fired him.

Because of his dismissal, Charney filed another lawsuit on June 19 in the same court against the company and former board member David Danziger, who left his position on June 14. The lawsuit maintains Danziger worked to have Charney ousted as the chief executive by defaming him.

An American Apparel spokesperson said this recent complaint “is yet another example of the habitual nuisance lawsuits that Dov Charney and his lawyer continue to file and which we continue to defeat.”

Board shift

Charney’s lawsuit against American Apparel and Danziger stems from the annual shareholders meeting in New York in June 2014, when American Apparel’s then–chief financial officer, John Luttrell, and the board pressed Charney to vote his substantial shares to retain Danziger, Allan Mayer and Robert Greene as board members, documents said.

“In doing so, they voiced to Charney their continued support of him as the company CEO,” the lawsuit said.

But then, in what the lawsuit describes as a “shocking bait and switch,” at the subsequent board meeting, Mayer informed Charney that he would immediately be suspended as CEO and as an American Apparel employee, citing evidence of misuse of company funds and inappropriate behavior with employees, legal documents said. Charney has denied those allegations.

During a break in the meeting, Charney, with his 27 percent of the company’s stock, called the company’s second-largest shareholder, Johannes Minho Roth of FiveT Capital, which owned 12 percent of American Apparel’s stock. Roth had been a vocal supporter of Charney.

Roth reportedly suggested the two should collaborate to get Charney back as CEO. But Charney’s lawsuit maintains that Danziger contacted Roth and “told him, with the full knowledge that his statements are false, that Charney was being investigated for matters ‘criminal’ in nature.”

Because of this, the lawsuit said, Roth told Charney that FiveT, a Swiss wealth-management company, could not partner with the former CEO to retake the company.

Because of a flurry of lawsuits filed by Charney, American Apparel on June 1 obtained a temporary restraining order from the Delaware Chancery Court preventing Charney from trying to oust board members and criticizing the company until after the annual meeting on July 16 in Chicago.

Paula Schneider, who became American Apparel’s chief executive on Jan. 5, has filled the board seat once held by Danziger. She has been trying to turn the company around, despite huge losses at the largest apparel factory in the United States.

In 2014, the company lost $68.8 million on $608.9 million in revenues, and in 2013 it lost $106.3 million on $633.9 million in revenues. Its stock price has been trading at around 51 cents a share, after hitting a 52-week low of 41 cents on June 22. The 52-week high was $1.30 on July 14.