Ex-American Apparel CEO Charney Ordered to Curb Criticism

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Fired American Apparel Inc. founder Dov Charney was ordered by a judge to muzzle his criticism of the struggling clothing retailer, at least temporarily.

Delaware Chancery Judge Andre Bouchard on Monday granted American Apparel’s request for a restraining order against Charney, putting the kibosh on the former chief executive officer’s alleged scorched-earth campaign to win back control of the company he founded in 1998.

Charney must abide by a 2014 agreement barring disparaging statements and actions to influence or support third parties ahead of the company’s annual meeting on July 18, Bouchard said after a hearing Monday in Wilmington.

“The standstill is an agreement that Mr. Charney has to abide by,” Bouchard said. “He may not like it but he has to deal with it.”

The judge said a hearing on whether to extend the ruling may be held as early as June 30.

In a separate lawsuit, a federal judge in Los Angeles on Monday tentatively denied a request by two American Apparel shareholders to block the company’s annual meeting. One of the two was Charney’s roommate at Tufts University.

Public Interest

U.S. District Judge Michael Fitzgerald said it wouldn’t be in the public interest to halt the meeting. He said the shareholders may be able to make a case that the company issued misleading proxy statements prior to last year’s annual meeting, when they say it touted Charney’s value to the company while already planning to terminate him,

Charney has been engaged in a war of words with company officials since June 2014, when the board voted to suspend him and later fired him for alleged misconduct. Directors alleged he violated sexual harassment policies and misused funds.

Charney blames disgruntled Chief Financial Officer John Luttrell for staging a coup after he wouldn’t go along with a plan to sell the retailer.

Charney filed a $20 million defamation lawsuit against the company and investor Standard General in state court in California last month over his ouster. His lawyer, Stephen Brauerman, said Monday that American Apparel filed its suit in retaliation days after Charney’s complaint.

No Right

“They’re trying to silence Mr. Charney in a way they don’t have a right to,” Brauerman said.

American Apparel alleged Charney was interfering with its operations and sabotaging its relationships with vendors and lenders, according to court documents.

Edward Micheletti, an attorney for company, said many of Charney’s actions were behind the scenes. He referenced an affidavit submitted by Paula Schneider, the current chief executive, who was told by a mutual friend of Charney’s in a May 21 phone conversation that the founder had recently discussed suitable director candidates for the annual meeting.

“My impression from this conversation was that Mr. Charney was actively encouraging potential candidates to run on a slate of directors that would represent his interests in connection with the 2015 annual meeting,” Schneider said in the affidavit.

Tipping Point

The company has reached a “tipping point,” Micheletti told Bouchard.

“The company doesn’t have the resources to fly into court every time Mr. Charney says boo,” Micheletti said.

The judge said the threat of irreparable harm to the company ahead of the annual meeting factored into his decision, as did the allegations of Charney’s recent conduct, including his filing of court papers in support of an unrelated lawsuit against company.

American Apparel’s net loss last month expanded to $26.4 million, or 15 cents a share, from $5.47 million, or 5 cents, a year earlier. Revenue fell 9.4 percent to $124.2 million.

The Los Angeles-based retailer has dismissed workers as it seeks to stem years of losses. The company has lost more than $300 million since 2010, according to data compiled by Bloomberg.

Shares of the company have tumbled more than 45 percent this year as it attempts a turnaround under Schneider.

The case is American Apparel Inc. v. Charney, CA 11033, Delaware Chancery Court (Wilmington).

(Updates with shareholder lawsuit in sixth paragraph.)
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