American Apparel’s Dov Charney Calls Ouster From CEO Job Illegal

Dov Charney, the American Apparel Inc. founder who was ousted as chief executive officer last week, accused the board of acting illegally when it moved to fire him for cause.

A letter sent by Charney’s lawyer demands that he be reinstated as CEO and chairman and calls for a meeting no later than tomorrow.

The move signals American Apparel won’t have a smooth transition as the retailer looks for a new leader and tries to fix its finances. The showdown follows an investigation into the conduct of Charney, who has faced sexual-harassment lawsuits over the years and drawn controversy for provocative ads.

According to the letter, Charney was given an ultimatum: If he stepped down as CEO and chairman while also giving up his voting rights as the largest shareholder, the company would hire him as consultant at a multimillion-dollar salary for at least four years. If not, he would be publicly fired.

“By presenting Mr. Charney with this absurd and unreasonable demand, the company acted in a manner that was not merely unconscionable but illegal,” Charney’s lawyer, Patricia Glaser, said in the letter.

Allan Mayer, co-chairman for the chain, confirmed that it had received the letter and declined to comment further. Charney declined to comment.

The company’s investigation into Charney delved into the sexual-harassment claims and also found he misused company resources, including buying plane tickets for family members and using corporate housing for friends and himself that wasn’t related to company business, said a person familiar with the situation who asked to not be identified because the details of the review aren’t public.

Waiting Period

When it suspended Charney June 18, the board said it would fire him after a contractual 30-day waiting period.

Directors don’t know how much money was involved in the alleged misallocation of funds, the person said. The misuse of money and corporate assets alone wouldn’t have been enough to dismiss Charney, the person said. When added to other revelations, including that Charney tried to retaliate against a woman who had sued him for sexual harassment, the board had no choice, the person said.

In 2011, a woman sued Charney for sexually assaulting her after coming to his house for a job interview. That same year, a second woman filed a complaint saying he 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.

The charges leveled against Charney by the board are “completely baseless” and didn’t damage the company’s finances or reputation, the letter from Charney’s lawyer said.

Creditor Negotiations

As it clashes with Charney, American Apparel is negotiating with creditors. His dismissal may trigger a notice of default, the company said. The retail chain also is talking with banks and private-equity firms about ways it could potentially pay off its creditors, according to the person.

Charney, 45, had a tumultuous run as the CEO of a retail 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. The cases were either dismissed or went to arbitration.

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. After years of negative headlines, the board started looking into Charney’s past actions on multiple fronts earlier this year. It used Jones Day, which had already been serving as counsel to the independent directors, as an adviser on the probe.

CNN Money reported on the letter earlier, while Reuters reported on the accusations about misuse of funds.

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