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American Apparel: Charney's Bad Behavior Was Very, Very Expensive

Dov Charney, chairman and chief executive officer of American Apparel, stands for a portrait in a company retail store in New York on July 29, 2010

Photograph by Keith Bedford/Bloomberg

Dov Charney, chairman and chief executive officer of American Apparel, stands for a portrait in a company retail store in New York on July 29, 2010

Dov Charney’s behavior has never been a secret. For starters, as the chief executive of American Apparel (APP), he occasionally walked around the Los Angeles headquarters in his underwear. He was open about his libertine attitudes toward sex in general and sex in the workplace in particular, at one point “putting on a show” for a journalist on assignment for Jane magazine.

So when Charney was fired last week “for cause,” it was reasonable to wonder “why now?” In his termination letter, posted on BuzzFeed yesterday, the board accuses him of sexually harassing employees, paying off some of them with “significant” severance packages, and refusing to participate in sexual harassment training.

Charney, through his lawyer, rejects all of this. His attorney, Patricia Glaser, says that the firing was illegal; she called the charges “baseless” and said that “most involve activities that occurred long ago (if at all) and about which the Board and the Company have had knowledge for years.” According to a four-page letter from Glaser to the company’s counsel (now posted on, Charney was given an ultimatum around noon on June 18: resign with a multimillion-dollar severance and a consulting deal, or be fired. The board also gave him a 3 p.m. deadline. Sometime after 9 p.m., Charney was suspended.

It is true that Charney’s antics are not new, but apparently they have grown unacceptably expensive. The letter to Charney eventually comes around to this point:

Your conduct has required the Company to incur significant and unwarranted expenses, including expenses associated with litigation and defense costs, significant settlement payments, substantial severance packages that were granted to employees, and unwarranted business expenses that you incurred for personal reasons. The Company’s employment practices liability insurance retention has grown to $1 million from $350,000. … The resources American Apparel had to dedicate to defend the numerous lawsuits resulting from your conduct, and the loss of critical, qualified Company employees as a result of your misconduct cannot be overlooked.

Also, investors’ tolerance has worn thin. It has been hard for American Apparel to raise money, and it is getting harder. The board goes on:

The Company has had a very difficult time raising capital and securing debt financing at reasonable rates because of your actions. Indeed, many financing sources have refused to become involved with American Apparel as long as you remain involved with the Company.

So what now? Charney, who founded American Apparel, still owns 27 percent of the stock. The largest outside investor is Johannes Minho Roth, who runs FiveT Capital, an investment firm in Zurich. Roth backed Charney initially, but by June 22 he had changed his mind. “At this point, I don’t think we will support Dov,” he said.

Meanwhile, in her letter, Glaser demanded a meeting with the board to “negotiate a process whereby Mr. Charney will be fully reinstated to his positions within the Company and to attempt to negotiate a process whereby Mr. Charney’s business reputation can be restored.” She wants the meeting to be held today.

Berfield is a writer for Bloomberg Businessweek in New York. Follow her on Twitter @susanberfield.

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