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Dov Charney vs. American Apparel: Game of Tactics

While most of the recent action has come from the ousted founder's rush to add to his stake, details might come out of the investigation that led to his firing.

American Apparel store in New York.

The battle for American Apparel Inc. might be just about to boil over.

While most of the recent action has come from ousted founder Dov Charney’s rush to add to his stake — late Monday he revealed he had boosted his stake; he now controls 43 percent of the company’s stock — additional details might come out of the investigation that led to his firing.

Someone familiar with the situation said the probe is ongoing and that indications are the results will be “of interest to everyone involved.” Those results are expected in “a matter of weeks and maybe even a matter of days,” the source told WWD.

Law firm Jones Day and FTI Consulting have been helping the board examine Charney’s colorful tenure as American Apparel’s chief executive officer. When he was fired two weeks ago, the board said he failed to prevent defamatory blog posts concerning a former employee and signed off on significant severance payments for former employees to shield himself from liability.

But that just begins to touch on the characteristics that built his reputation.

Charney crafted the company’s racy marketing and is well known for his sexually charged lifestyle. He has been repeatedly sued for sexual harassment, but the allegations were settled or dismissed.

Throughout it all, he has denied wrongdoing and is fighting his termination in arbitration and is said to be seeking $23 million to $25 million for wrongful dismissal.

Charney is widely seen as a very talented marketer, but also as someone perhaps too close to the company he founded.

“He’s a micromanager of monster proportions,” a financial source familiar with the company said. “Dov is not a quitter. He’s going to fight. He’s obviously heavily invested in this business. He sees it as his, which is part of the problem. Once you have a public company…the rules sort of change and I don’t think he ever got with that program.”

Charney has taken a big step toward his goal of retaking control of the company, borrowing nearly $20 million from Standard General to buy 27.4 million shares of the retailer. The move boosted his stake to 43 percent from 27.2 percent.

But he can’t add more than another 1 percent without triggering American Apparel’s poison pill and diluting his stake. Charney plans to file a consent statement with regulators to rally other shareholders to his cause, setting up something akin to a proxy fight with the board. He has also called for a special meeting of shareholders to rejigger the board in September, but the company’s sought to block the meeting.

If the board’s investigation does turn up anything damaging on Charney, that could become fodder in the struggle for control of the company.