SEC investigates American Apparel
Former CEO seeks $ 40M in damages stemming from his termination
American Apparel Inc., whose controversial founder was ousted last year for alleged misconduct, said the U. S. Securities and Exchange Commission has begun a probe into the situation.
The clothing chain learned on Feb. 5 that the SEC had issued a formal order of investigation into matters related to former chief executive officer Dov Charney, according to a filing the company posted Wednesday. The review, a fact- finding inquiry to figure out if the law was violated, won’t be public, said American Apparel, which pledged to co- operate with regulators.
The probe is the latest development in a nine- month saga that began in June when the Los Angeles- based company first suspended Charney. The board alleged that he violated sexual harassment policies and misused funds. Charney was ultimately fired in December after an outside firm investigated the matter. His lawyer has called the allegations “baseless.”
Since Charney’s suspension, he has been pushing to get his job back. His efforts included a deal last year with hedge fund Standard General that Charney later said backfired. He borrowed funds from the firm to increase his American Apparel stake to 43 per cent of outstanding shares, agreeing to share voting rights in the process. Standard General also pledged to pump $ 25 million US of financing into American Apparel.
But Standard General didn’t reinstate Charney at the clothing chain. Although the board offered him a deal to stay on as an adviser, he turned down the proposal because of concerns that Standard General had too much sway over the company, people familiar with the matter have said.
After his dismissal in December, Charney said that the hedge fund double- crossed him.
“I gave them my entire life’s work and they agreed to put me back in,” he said. “They betrayed me.”
Charney is seeking $ 40 million in damages stemming from the termination.
“We are moving forward with Mr. Charney’s employment claims,” Keith Fink, a lawyer for Charney, said in an email.
After he was initially suspended as CEO in June, Charney made claims for breach of his employ- ment contract that went into arbitration in California, where the company is based. He then agreed to put them on hold until a final decision was made on his future at the retailer. Following an investigation, the board fired him in December for alleged misconduct.
The legal threat comes as the Los Angeles- based company struggles to pull out of a slump. Sales sank 9.2 per cent in the fourth quarter, the worst performance in four years, and it had just $ 8.3 million in cash at the end of the year.
Charney’s claims include almost $ 6 million in severance, $ 1.3 million in vacation- time pay, at least $ 10 million for emotional distress and 13 million shares of American Apparel, according to a letter sent to a law firm representing American Apparel that Fink provided.
American Apparel disclosed in a filing Wednesday that it had been told that Charney would reinstate his demand for arbitration.