American Apparel Resolves Lawsuits Against Ousted CEO Dov Charney

Months after firing Dov Charney, two lawsuits against the founder and former chief executive of American Apparel have been settled.

In the resolution of one lawsuit, awards and attorneys’ fees will cost Charney, American Apparel and the company’s photographer at least $2.5 million, according to court documents. Another lawsuit’s settlement remains confidential.

Cleaning up frayed legal ends comes as American Apparel executives are entertaining offers to sell the company. Irving Place Capital, a New York private equity firm, said it would be interested in offering up to $1.40 a share for the Los Angeles clothing concern, whose stock has been trading around 73 cents a share.

While Bloomberg News recently reported that those talks had stalled, a source close to the proceedings said the talks with Irving Place were ongoing.

A rash of lawsuits against Charney, claiming sexual harassment, assault and battery, among other things, was one of the reasons the American Apparel board of directors said it decided in December to fire the company founder as its chief executive for alleged misconduct.

Paula Schneider, a veteran apparel executive who headed up Speedo USA and Laundry by Shelli Segal, was named the new chief executive, assuming her job in early January. Since her arrival, she has dismissed two creative directors— Iris Alonzo and Marsha Brady—and on March 13 fired head designer Merrily Lupo, who had worked at the company for some 14 years.

PR campaign

Meanwhile, Charney is trying to inch his way back into the company even though he was dismissed from all executive duties and signed a stand-still agreement.

He currently owns 43 percent of the company’s stock, with the help of a loan from New York hedge fund Standard General, the investor that loaned him money to increase his stock percentage from 27 percent to 43 percent. But as collateral for the loan, Charney relinquished his voting rights to Standard General.

Charney thought Standard General would help him regain control of the company and return him to his executive office, but the hedge fund ended up backing the board of directors’ decision to terminate Charney’s affiliation with the clothing company he founded in 1998. “We stole the car together, and then they threw me out the door,” Charney remarked recently.

Still, Charney said he “ain’t gonna let go.” He has been mounting a public-relations campaign for his return by rallying the workers who sew the T-shirts, shorts, rompers and underwear made in a huge factory in downtown Los Angeles.

Hermandad Mexicana, a nonprofit that advocates for immigrants rights, is working with the “Coalition of American Apparel Factory Workers United to Save American Apparel” to conduct meetings related to workplace complaints and alleged deteriorating work conditions under the new management.

On March 19, Hermandad Mexicana said sent a letter on behalf of American Apparel workers to the company’s board of directors complaining of 13 items that included employee morale being at an all-time high, the sweatshop-free business model being jeopardized, the current board of directors not having clothing or retail experience except for one member, and that as soon as Standard General was introduced to the company, the cash flow began to deteriorate.

American Apparel’s Schneider said in a statement that she supports employees’ rights to state their views and will engage in active dialogue with them while she tries to turn the company around and preserve 3,300 jobs in downtown Los Angeles.

The apparel company also announced recently that it plans to improve workers' benefits by lowering the cost of medical insurance, and it will add a retirement savings plan for factory employees.

In support of Charney, Hermandad Mexicana website has a link to a page called “I Love Dov.” On it is a petition asking people to sign if they want to see Charney return as the head of American Apparel.

The “I Love Dov” page notes that “Dov is the founder of American Apparel and he made it large and great by working with and listening to us, the workers.” It goes on to say Charney made it possible for the workers to receive good wages and benefits, defended the rights of immigrant families, and that he opposes the lay-offs that the current American Apparel management is carrying out.

Schneider and a mostly new American Apparel board of directors are trying to turn around a company that has had more than $300 million in net losses since 2010. Last year, it was near bankruptcy, sources said, and had to issue a new round of stock to raise more capital to keep the company afloat.

That round of capital initially ended up diluting Charney’s direct ownership from 43 percent of the company’s stock to 27 percent.

On March 18, American Apparel told the Securities and Exchange Commission it would delay filing its annual financial report while it reworks a lending agreement with Capital One Financial Corp. to receive a $15 million loan from Standard General.

Last year, Standard General agreed to capitalize American Apparel for $25 million in exchange for board seats. The first $10 million was used last July to buy an American Apparel loan with Lion Capital.

American Apparel said it estimates that sales for 2014 were down 3.9 percent to $609 million with a $69 million net loss compared with a net loss of $106 million the previous year.

Settling up

The legal settlements are just the latest chapter in an ongoing saga that had several people—both former and current employees at the time of the filings—suing Charney and his company for sexual harassment, assault and other misdeeds.

Four years ago, Irene Morales, Alyssa Ferguson and Tesa Lubans-Dehaven, former American Apparel employees who previously had filed sexual-harassment lawsuits against Charney, followed their first lawsuits with another lawsuit against Charney, American Apparel and company photographer Kyung Chung for defamation, intentional infliction of emotional distress, invasion of privacy and impersonation online.

In that second lawsuit, filed in Los Angeles County Superior Court, the former American Apparel employees said fake blogs purporting to belong to them began showing up on the Internet after they filed their first sexual-harassment lawsuits.

On the alleged fake blogs, it looked as if the women had pasted nude or semi-nude pictures of themselves on the Internet, legal papers said. The purportedly fake blogs also made it appear as if the women were admitting to an unlawful scheme to extort Charney and American Apparel, the lawsuit said.

The case eventually went to arbitration last year. The result is that in January, the court granted Ferguson a $1 million award as well as $814,000 in attorneys’ fees. Morales was awarded $200,000 and $506,000 in attorneys’ fees. Lubans-Dehaven requested to be dismissed from the lawsuit after her portion of the lawsuit was resolved last May.

In another recently settled case, Michael Bumblis, a former American Apparel store manager in Malibu, Calif., filed a lawsuit alleging that Charney choked him and tried to rub dirt in his face.

In the lawsuit filed in Los Angeles County Superior Court in 2012, Bumblis said that on April 29, 2012, Charney visited the Malibu store with creative director Iris Alonzo.

Bumblis said Charney was at the store to inspect a new renovation project. Going to a second-story makeshift stockroom, the lawsuit said, Charney started to complain about dirt in the area and that there was too much inventory even though the company had converted to a just-in-time inventory system.

When Bumblis commented that the just-in-time inventory system didn’t always work, Charney shouted, “That’s not good enough” and “dove at plaintiff, grabbed plaintiff’s throat with both hands and began to forcibly squeeze plaintiff’s throat in an attempt to choke and strangle plaintiff. … Plaintiff began gasping for air and making a gagging sound after which time Charney released his grip,” the lawsuit said.

The two went downstairs, where Charney found dirt between a makeshift dressing room and a wall, legal papers said. Picking up the dirt, the American Apparel executive tried to smudge it on Bumblis’ face, the lawsuit said.

The lawsuit, which claimed Charney assaulted and inflicted emotion distress on Bumblis, was settled in February in a confidential filing.