Ousted American Apparel CEO Undone by Controversial Past

In the end, not even the sales skills that helped Dov Charney turn a tiny T-shirt maker into a global apparel chain could save his job.

On June 18, American Apparel Inc. (APP)’s directors announced they would terminate Charney as chief executive officer, but not before he tried to convince them otherwise at a board meeting in New York that lasted several hours, according to two people familiar with the situation. The company then replaced Charney with Chief Financial Officer John Luttrell, who will serve as interim CEO.

While Charney, 45, is expected to fight his removal, for now the board’s actions bring to a close a tumultuous run leading a chain that once was a byword for hip fashion. The company’s early successes were overshadowed by controversy after several female employees accused Charney of sexual harassment. More recently, the business has suffered because the chain expanded too quickly, opened a malfunctioning distribution center that disrupted the supply chain and lost touch with its youthful customers.

“We take no joy in this, but the board felt it was the right thing to do,” Allan Mayer, the lead director, said in a statement.

Investors applauded the move, sending the shares up 6.7 percent to 68 cents yesterday in New York. They had fallen 44 percent this year.

Two versions of Charney’s removal emerged from interviews with people close to the situation.

Past Accusations

One is that the board investigated past accusations of sexual misconduct against Charney, verified some of the details and removed him because his actions put the chain at risk. The other is that the board used the old allegations as leverage to force Charney out and make American Apparel a more attractive takeover target.

Charney declined to comment.

In an interview, Mayer said Charney “was clearly a controversial and polarizing figure, and the assets always outweighed the liabilities. What we discovered this year changed that equation.”

There are no plans to sell the company, Mayer said.

American Apparel’s largest outsider investor -- Johannes Minho Roth, who runs the Swiss investment firm FiveT Capital AG -- said he was surprised by Charney’s removal and wondered whether the board was preparing for a sale. He also said he expected Charney, still the company’s largest shareholder, to fight the termination.

Charney Counterattack

“I don’t think this is over,” said Roth, whose firm owns a stake of about 13 percent in American Apparel. “Dov is going to fight very hard. I think he will do a counterattack. I don’t think he will give up his dream.”

Charney, a Montreal native, started American Apparel during his freshman year at Tufts University in Boston. He became so absorbed in the project he never graduated, setting off instead for South Carolina, where he employed 20 women to make T-shirts in a barn with no air conditioning. Ten years later, he moved the company to Los Angeles, where there was greater manufacturing capacity.

In 2003, Charney saw a retail space for rent in Manhattan and had an epiphany about where he could take his business. He promptly opened three stores -- in New York, Los Angeles, and Montreal -- and by 2006 he had 100 more. Today, the company has about 250 locations globally.

“Everybody along the journey thought I was crazy,” he told Bloomberg Businessweek in 2010.

Charney has attracted his share of controversy over the years. In 2011, a woman sued him for sexually assaulting her after coming to his house for a job interview.

Nude Pictures

That same year, a second woman filed a complaint saying Charney retaliated against her for a previous lawsuit by leaking nude pictures of her and sexually explicit e-mails to the New York Post and the Los Angeles Times. A California judge agreed with the company that the women’s claims should be resolved through arbitration rather than a trial.

In 2010, the U.S. Securities & Exchange Commission investigated American Apparel over a change in accounting firms and declined to file charges. Shareholders also sued the company after the firing of undocumented factory workers in 2009 led to sales declines and losses. American Apparel agreed to pay $4.8 million to settle the suit.

In 2011, with the business deteriorating, the company’s creditors persuaded Charney to bring in professional management help, including industry veteran Martin Staff as chief of business development. At the time, Staff told Bloomberg News that American Apparel held promise.

Six months later, he quit.

Butt Heads

“I do have great respect for what the guy has done and does do, but we did butt heads a lot,” Staff said at the time, referring to Charney. “We did agree on a lot, but we did disagree a lot. This is clearly Dov’s company.”

Since then, the company has gone through more ups and downs. Sales rebounded for a while only to fall again last year, which increased losses. The stock price sank as well, prompting NYSE Amex in February to threaten to delist the shares if the company’s finances didn’t improve. The chain then raised $31 million via an equity offering that brought in FiveT as an investor.

Charney’s exit removes a distraction for investors, said Eric Beder, an analyst at Brean Capital LLC in New York.

“The Street appreciated what he did with the brand, but he had issues in terms of lawsuits and overall performance of the stock,” Beder said in an interview. “The Street is looking at this as an opportunity for another CEO to run the company in a much more normalized fashion.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Robin Ajello

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