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American Apparel Accused in Suit of Firing CEO to Sell Chain

Dov Charney was fired as American Apparel Inc.’s chief executive officer because he wouldn’t go along with a plan to sell the clothing retailer, according to a shareholder lawsuit brought by two men with ties to him.
American Apparel LA store | Source: Flickr
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  • Bloomberg

LOS ANGELES, United States — Dov Charney was fired as American Apparel Inc.'s chief executive officer because he wouldn't go along with a plan to sell the clothing retailer, according to a shareholder lawsuit brought by two men with ties to him.

Citing information they said was gathered from Charney and a former board member they didn’t identify, the shareholders claim then Chief Financial Officer John Luttrell approached Charney about selling the company. After he refused, Luttrell orchestrated Charney’s firing for alleged misconduct, aiming to set the stage for a future sale, according to the complaint.

The suit is the latest twist in a 10-month battle for control of American Apparel. The 46-year-old Charney has tried unsuccessfully to return to the apparel chain, which he founded and made famous for controversial advertising and made-in-America production.

The lawsuit was filed by shareholders Jan Willem Hubner and Eric Ribner, who both have connections to Charney. Hubner worked for him for years in management roles, including American Apparel’s operations manager for Europe. He’s no longer employed by the clothing company. Ribner, meanwhile, was Charney’s roommate at Tufts University in Massachusetts.

Luttrell ignored a chance to negotiate with bondholders on an interest payment and instead sold shares so American Apparel could afford to pay the full amount, according to the complaint filed Tuesday in Los Angeles federal court. That move reduced Charney’s 43 percent stake to 27 percent, making his ouster easier, the shareholders said.

Charney and American Apparel, based in Los Angeles, declined to comment. Luttrell didn’t respond to a request for comment.

Proxy Fraud

The CEO’s firing amounted to proxy fraud, according to the complaint, because shareholders, including Charney himself, voted at the annual meeting on June 18 without being told that the company’s leader was being investigated by the board for misconduct.

The proxy documents at the time didn’t disclose displeasure with Charney, saying his roles as CEO and chairman were “in the best interests of all stockholders” and he is “intimately connected to American Apparel’s brand identity and is the principal driving force behind American Apparel’s core concepts and designs.”

Later that day, after the investor vote, the board moved to fire Charney, who was also chairman, by serving him with a termination letter. This list of misdeeds, which Charney’s lawyer has called “baseless,” included violating sexual- harassment policies and misusing funds. Luttrell was then named interim CEO, and Charney was suspended until a deeper probe into his actions was completed. His firing was completed in December.

The plaintiffs are seeking to have the election invalidated and recast. They also want all defendants currently on the board, which would be Allan Mayer and David Danziger, removed.

“Charney’s alleged misdeeds are beside the point for these proxy fraud claims,” according to the investor complaint. “Shareholders should have been given a voice with regards to the company’s direction, and the solicitation materials disseminated by the defendants were materially misleading.”

The case is Hubner v. Mayer, 15-02965, U.S. District Court, Central District of California (Los Angeles).

By: Matt Townsend; editor: Nick Turner.

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