American Apparel, Charney Sued Over Alleged Misconduct

American Apparel Inc. and ousted Chief Executive Officer Dov Charney were sued by shareholders over claims directors ignored Charney’s misconduct that violated the company’s sexual harassment and discrimination policies.

The lawsuit cites a June 18 letter by directors suspending Charney as CEO and describing how he authorized severance packages to former employees, and raises and bonuses for current employees, in exchange for agreements protecting him from personal liability for sexual misconduct.

American Apparel, a Los Angeles-based maker of casual clothing, has racked up about $270 million in net losses since 2010 and had to raise capital several times. The removal of Charney, who has grappled with sexual-harassment allegations and drawn flak for suggestive advertising, has added to the turmoil.

“The board has long known and has recklessly ignored these and other problems with American Apparel’s operations, finances, management and personnel,” according to the complaint filed today in federal court in Los Angeles. “Even after their belated investigation found substantial evidence warranting Charney’s termination, the board did not immediately take steps to initiate that termination process.”

American Apparel’s stock price plummeted from $15 in 2007 to a low of 47 cents in early 2014, and the company has been forced to borrow at interest rates of as much 20 percent, according to the complaint. Charney’s mismanagement has made it difficult to attract and retain qualified employees, the investors claim.

The investigation leading to Charney’s termination found he retaliated against a former employee who sued him for harassment and that he misused corporate funds, a person with knowledge of the matter said. The company has since enlisted FTI Consulting Inc. to investigate Charney further and plans to make the results public at some point.

Sallie Hofmeister, a spokeswoman for American Apparel, declined to comment on the lawsuit.

The case is Federman v. Charney, 14-cv-05230, U.S. District Court, Central District of California (Los Angeles).