Dov Charney Files Lawsuit Accusing Hedge Fund of Defamation

As of Wednesday, May 13, 2015

In another legal shot fired in the ongoing battle over control of American Apparel, the dismissed clothing company’s founder filed a lawsuit alleging that hedge fund investor Standard General said it would defame his character if he didn’t give up control of his American Apparel stock.

The lawsuit, filed May 7 in Los Angeles County Superior Court, is asking for $30 million in damages.

Dov Charney, who started American Apparel in 1998, was ousted as the company’s chairman of the board and suspended as chief executive officer last June while an investigation was conducted into alleged misconduct by Charney. Charney maintains in his lawsuit that the investigation was not done by an outside independent company, as promised, and cost the company millions of dollars at a time it was losing money. (In American Apparel’s annual report, it notes it paid $10 million for an independent investigation while the company had a net loss of $68.2 million.)

Following his suspension and while the investigation was being conducted, Standard General helped Charney buy additional stock in his attempt to return to American Apparel. Between the two of them, the hedge fund and the former CEO both control Charney's 42 percent stake in the company’s stock.

Charney maintains in court papers that in December, American Apparel’s board of directors abruptly and unlawfully terminated him as the chief executive officer following the investigation into alleged misconduct. “Charney’s termination was part of the board’s then-secret plan to wrest control of the company away from Charney,” he said in court papers.

“At the company’s annual meeting on or around June 18, 2014, American Apparel’s board of directors presented two options to Charney. Under the first option, Charney could resign his position as CEO and chairman of the board and sign over to the board the voting right to his then 47.2 million shares in exchange for which he would receive a multi-million-dollar severance package and remain with the company as a consultant.

“American Apparel’s director Allan Mayer specifically informed Charney that the company had drafted a ‘positive’ press release that would accompany his selection of the first option,” the lawsuit said. “If Charney refused the first option, American Apparel informed Charney that the company would terminate him ‘for cause.’ Several American Apparel board members specifically informed Charney that his termination would be made public and that the company would do anything and everything to destroy Charney’s personal and professional reputation and character.”

Charney also claims in his lawsuit that Standard General had promised they would help him “reassert control over American Apparel and push out the renegade board members who had unceremoniously ousted him from the company he founded nearly 20 years earlier.”

“The parties quickly entered into a series of agreements with the express purpose of placing Charney back in control over American Apparel as its CEO,” court papers said.

But later, Standard General’s junior partner, Robert Lavan, contacted Charney and said the fund’s chief executive, Soo Kim, was told by his more conservative investors that they were unhappy by Kim’s association with Charney, legal documents maintain.

Charney’s lawsuit maintains that Kim said a hostile proxy contest over American Apparel would be too risky for Standard General’s continued operations, and that Kim convinced Charney of “settling with the American Apparel board of directors under terms extremely favorable to Standard General but not to Charney or to the company’s other shareholders. In this way, Standard General effectively took over American Apparel by and through its control of company stock and the board of directors,” the lawsuit said.

“[Standard General] promised Charney that he would be reinstated as CEO unless the investigation revealed something profoundly egregious of which Standard General was unaware,” court documents said.

The investigation concluded in December and Charney was fired. Veteran apparel executive Paula Schneider was named to replace him.

In response to the lawsuit, a Standard General spokesman said: “Dov Charney and his associates continue to file frivolous, meritless lawsuits at a breakneck pace. The facts speak for themselves, and we are confident that Mr. Charney will be held accountable for this knowing, intentional abuse of the legal system.”

Several other lawsuits have been filed in the last month by American Apparel shareholders who used to work for the company or are Charney’s friends, claiming that the board sent out false proxy statements saying they supported the American Apparel founder when they were allegedly plotting to get rid of him.

An American Apparel spokesman reiterated Standard General’s response. “Dov Charney, Dov Charney’s lawyer and other people related to Dov Charney continue to bring claims that are wrong on the facts and wrong on the law. Each of these claims is rooted in the same exact agenda. These meritless claims serve as public relations opportunities now, but they will each fail the test when put before a judge.”

Charney’s lawsuit goes on to say that the independent investigation that was supposed to be conducted by FTI Consulting, was in fact overseen by law firm Jones Day, which has done legal work for American Apparel. “The sham, show trial nature of the investigation was further underscored by the fact that Charney never received the contractually-mandated investigators’ report, nor was Charney permitted to speak with FTI investigators about their findings, nor was he given copies of any ‘evidence,’ they gathered as part of their investigation.”