Lion Capital Said to Want Return of American Apparel CEO

Lion Capital LLP is threatening to call in a $10 million loan to American Apparel Inc. unless the retailer reinstates ousted Chief Executive Officer Dov Charney, according to a person familiar with the situation.

Barring an investigation that finds illegal or immoral activities by Charney, the hedge fund believes his return would be best for American Apparel because it would stabilize the chain in the short term, said the person, who asked not to be named because the matter isn’t public.

Lion will make its case today in a meeting with Standard General LP, another hedge fund that’s now the chain’s largest investor and is in talks with the retailer about how to turn it around, the person said. London-based Lion will file a notice to accelerate payment of its loan before U.S. markets open tomorrow if it’s not satisfied by Standard General’s plans, the person said.

Lion had a stipulation in its loan agreement signed last year saying that if Charney left the company, it would be in default. Lion didn’t grant a waiver on the loan after the board suspended Charney on June 18 with intent to fire him 30 days later for cause. Lion gave the chain a deadline of July 4 to explain Charney’s ouster or reinstate him, a date that passed without either condition being satisfied, the person said.

American Apparel has said it has the funds to pay off the loan and began an investigation into Charney to certify the reasons for his dismissal. A spokesman for Los Angeles-based American Apparel didn’t immediately respond to a request for comment.

Credit Line

If Lion goes through with demanding repayment, it may cause even more headaches for the board, which has been fending off Charney’s attempts to get his job back. Such a demand would trigger the default of a $50 million credit line from Capital One Financial Corp. because of cross-default provisions in the agreements. Since $30 million of the credit line already has been drawn, American Apparel would lose access to $20 million still available.

Lion also would like to see experienced retail executives added to support Charney for a few years, and then consider moving him to a president’s role under a new CEO, the person said. Lion couldn’t be reached for comment after normal business hours.

Standard General struck an investment deal with Charney after he was ousted that gives the partnership a combined 43 percent stake in the chain. To get the deal done, Charney agreed to give up voting rights for his 27 percent stake, a person familiar with the situation has said. Standard General made no assurances that it would push for him to return as CEO, while agreeing to try to keep the chain’s manufacturing in the U.S., a person familiar with the situation has said.

Internal Probe

The process was set in motion when American Apparel replaced its CEO after a probe by the board that allegedly uncovered misconduct, including retaliating against a former employee who sued him and the misuse of corporate funds, according to a person familiar with the probe. The board has since enlisted FTI Consulting Inc. to investigate Charney further and plans to make the results public at some point.

The company has posted about $270 million in net losses since 2010 and has been forced to raise capital several times to survive, most recently in March.

Charney has refused to walk away from the company. He struck the deal with Standard General in which he borrowed about $20 million to buy shares.

Charney’s Stake

The fund also has warrants to buy back the shares Charney purchased as well as 10 percent of his original stake. If Charney defaults on the loan, Standard General would receive all his shares, which were used as collateral.

Lion also holds warrants to buy 24.5 million shares with an exercise price of 66 cents each, according to public filings. That would equal a 14 percent stake in the company.

Standard General’s talks with American Apparel include reshaping the board with independent directors who could choose a different CEO, a person familiar with the situation has said. A new board would have to consider the results of the directors’ investigation into Charney before deciding his future with the company, the person said.

The New York Times reported on the meeting between Lion and Standard General earlier.

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