Dov Charney is now on the outside looking in at American Apparel Inc. — but the battle might be headed to the courts.
Six months after allegations of misconduct led to a boardroom coup that stripped Charney of his role as chairman and sidelined him as chief executive officer and president, the company finally fired its colorful and often problematic founder for cause.
While the long-expected resolution settled one headache for American Apparel, it could have created another migraine: Firing Charney for cause opens up the retailer to a potentially taxing and very expensive legal battle just as new management tries to plot and then execute on a tricky turnaround. Charney’s attorney, Patricia Glaser, chair of the litigation department at Glaser Weil in Los Angeles, could not be reached for comment Tuesday.
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Even so, investors seemed happy to be moving on. American Apparel’s stock rose 7 cents, or 12 percent to 65 cents in early Nasdaq trading today.
Stepping in as the retailer’s ceo is Paula Schneider, who has held senior roles at Warnaco, BCBG Max Azria and Laundry by Shelli Segal. She takes the reins from Alvarez & Marsal executive Scott Brubaker, who has been serving as interim ceo and will stay in the post until Schneider joins Jan. 5.
It is a significant turning point for American Apparel and Charney, who in his years at the company has been many things: founder, herald of U.S. apparel manufacturing, advocate of immigrants, risk-taker, lightning-rod libertine, sharp-eyed marketer with an amateur porn flair and target of sexual harassment suits (none of which have been proven).
And until now, he’s been a survivor, scrappy and bold, building an international brand on blank, American-made T-shirts. When the retailer’s performance began to stall and cash became tight, he lurched from one backer to another, accepting higher and higher interest payments to keep his company afloat.
Tuesday’s firing would appear to indicate that Charney has spent at least most of his nine lives, but he likely still has a significant part to play in the story of American Apparel — a company that is deeply infused with his sensibility and micromanaging style.
“I’m proud of what I created at American Apparel and am confident that, as its largest shareholder, I will have a strong relationship with the company in the years ahead,” Charney said in a statement. “Naturally, I am disappointed with the circumstances and my over 25 years of deep passion and commitment for American Apparel will always be the core DNA of the company.”
American Apparel’s board suspended Charney in June for alleged misconduct and violations of company policy after a marathon 10-hour closed-door annual meeting. Although the allegations were never specified, the firm was said to have claimed that Charney failed to prevent defamatory blog posts concerning a former female employee and signed off on significant severance payments for former employees to shield himself from liability.
The suspension came as a surprise to Charney, who went on the offensive. From a temporary base in New York, he pursued a two-pronged approach: fighting his dismissal in arbitration and looking for a backer to regain control at the firm he founded.
Charney ultimately teamed up with the little-known Standard General, an investment firm led by managing partner Soo Kim. Charney borrowed nearly $20 million from Standard General to buy 27.4 million shares of the retailer. That boosted his stake in the company to 43 percent from 27.2 percent, but tied him to the investment firm.
And Standard General was careful to keep Charney at arm’s length.
“This transaction is not about the founder, nor is it an endorsement of him,” Standard General said at the time. “He is the largest shareholder, and the voting agreement allows us to control his block of shares….He can no longer vote his shares without our consent.”
The investor extended American Apparel $25 million in financial support and cut an agreement that gave it substantial influence to remake the board, which set up a committee to investigate Charney with the help of FTI Consulting.
Many waited for the deluge of salacious tidbits. But besides a video of Charney dancing naked, nothing new really came to light, although many argue that the ceo’s exploits should have long ago disqualified him from running any company, let alone American Apparel.
As the board investigated Charney, he got back to work as a consultant for the retailer, popping up in stores, speaking on a weekly conference call with store managers and showing up at MAGIC’s Pool Trade Show in Las Vegas. Charney seemed to be headed toward some measure of redemption and worked out an arrangement in principle that would have allowed him to stay on in some capacity.
One source said a deal was worked out earlier this month and then Charney seemed to disappear. With no agreement in hand, the company reverted to its initial plan to get rid of him.
A statement from American Apparel said that, “Based on this investigation, the special committee determined that it would not be appropriate for Mr. Charney to be reinstated as ceo or an officer or employee of the company.” He also ceased operating as a consultant for the retailer.
This pushes Schneider to the fore, although she has no seat on the board.
“My goal is to make American Apparel a better company, while staying true to its core values of quality and creativity and preserving its sweatshop-free, Made in USA manufacturing philosophy,” she said.
Allan Mayer, cochairman of the board, said, “We’re pleased that what we set out to do last spring — namely, to ensure that American Apparel had the right leadership — has been accomplished.”
David Danziger, the board’s other cochairman, said, “This company needs a permanent ceo who can bring stability and strong leadership in this time of transition, and we believe Ms. Schneider fits the bill perfectly.”
Although there is some closure, it’s been a costly battle. American Apparel spent $5.3 million on legal and consulting fees tied to the investigation in the third quarter alone. That’s money it can little afford, since the retailer remains deeply in the red: Net losses totaled $19.2 million in the third quarter alone and $40.9 million for the first nine months of the year.
And the legal fees seem destined to only continue.