Friday, July 25, 2014
Inquirer Daily News

Firing of American Apparel's controversial CEO could lead to default, bankruptcy

In this handout image provided by American Apparel, CEO of American Apparel Dov Charney poses for a photo on undated in Los Angeles, California. (Photo by American Apparel via Getty Images)
In this handout image provided by American Apparel, CEO of American Apparel Dov Charney poses for a photo on undated in Los Angeles, California. (Photo by American Apparel via Getty Images) Getty Images

His company's advertising favored provocative women, and so did he.

Now American Apparel Chief Executive Dov Charney's highly sexualized lifestyle has cost him stewardship of the company he founded - and may destroy it.

The company suspended Charney on Wednesday pending "an ongoing investigation into alleged misconduct," American Apparel said in a statement. A source familiar with the matter characterized the behavior as poor judgment and questionable conduct with women.

American Apparel filed documents with the Securities and Exchange Commission saying that ousting Charney from the Los Angeles-based retailer's top slot could trigger defaults on nearly $40 million in outstanding loans and force the company into bankruptcy.

The 45-year-old executive created American Apparel in his dorm room while a student at Tufts University and went on to move mountains of merchandise. But he's been dogged for years by allegations of sexual misconduct and harassment inside his innovative clothing company.

The allegations sometimes threatened to overshadow his commitment to producing quality products in America, using local labor, and his insistence on paying employees a living wage inside the "sweatshop-free" factory in downtown Los Angeles.

This week, they became his undoing.

The board decided Wednesday to replace Charney as chairman and terminate him as chief executive after 30 days. The unanimous vote suspended Charney immediately. The company's chief financial officer, John Luttrell, was named interim CEO.

Reached on his cellphone in New York on Thursday, Charney declined to comment, saying it was a sensitive time for him.

Charney's sudden firing probably will lead to drastic changes at the company, analysts said - layoffs, store closures, bankruptcy, a sale and even a shift away from the "made in America" manufacturing strategy Charney championed.

A night owl who obsesses about business, Charney is known to phone employees at all hours - and even to wake them with a knock on the door - to talk shop.

In his personal bio, Charney speaks nostalgically of his Jewish Canadian roots, of Montreal's famed "smoked meat" restaurants and its bagels. (He keeps dozens frozen at home, he has said.) Never married, the entrepreneur was known for his hipster style, which included giant eyeglasses and tight shirts.

He lives in an 11,000-square-foot mansion in Los Angeles, having purchased the house and 82,000-square-foot hilltop grounds for $4.1 million. Named for a movie pioneer who built the bunker-like, concrete-and-steel structure in 1926, the eight-bedroom, seven-bath hilltop Garbutt House is now part of a private, gated community.

Tokiko Miyashiro, 42, an independent consultant who works with American Apparel and said she has known Charney for ten years, called the embattled executive "a good person."

"He feeds everybody. He's always there for everybody," Miyashiro said Thursday afternoon, standing outside the Charney home. "Without him, I cannot pay rent."

American Apparel was a hot Wall Street commodity before the 2008-09 market crash, with its stock trading as high as $15 per share in 2007.

Since then, shares have plummeted 95 percent, closing at 68 cents on Thursday, up 7 percent. Only one of the past 17 quarters has been profitable for American Apparel. The company has lost nearly $270 million in the past four years.

Charney's compensation package plunged from $14.5 million in 2012 to only $1.07 million for 2013.

Industry analysts said Charney, despite his peccadilloes, should get credit for building an iconic and socially responsible brand.

"Dov, for all of his misbehavior, was trying to do the right thing. He wasn't paying workers in Bangladesh $2 a day; he was paying $10, $15 an hour in Los Angeles," said Ronnie Moas, founder of Standpoint Research. "He's very stubborn, utopian, idealistic."

He was also indiscreet, and interwove his private interests into his company's public face.

"He had mannequins with pubic hair, a 60-year-old lingerie model, a playboy mansion full of 18-year-old girls," Moas said. "He had a problem with his behavior, and it overshadowed all the good he was trying to do."

He had business problems as well. In recent years, the company has had to remove hundreds of employees after they were found to be without required documentation.

In May 2009, American Apparel announced it had settled a $10 million lawsuit brought by filmmaker Woody Allen, who sued the retailer for using his image on its billboards without permission.

Critics loved to hate the racy imagery in the company's ads, some shot by Charney personally and many emblazoned on boulevard billboards near American Apparel retail outlets.

But Luttrell said Thursday that the company had no plans to change its "made in America" commitment, or to leave downtown Los Angeles, and did not intend to sanitize its signature look.

"The edgy marketing and advertising is a big part of the brand," he said. "There is no reason to change it. It works."

Charney and his company battled repeated accusations of harassment; several cases are still pending, while others have been settled.

But American Apparel always stood behind its founder. In 2011, the company fought back publicly when four female former employees filed a sexual harassment lawsuit.

At the time, the company told the Los Angeles Times that the women were friends who were colluding to "shake down" Charney and the company for money, and that it had "voluminous evidence" to prove that the allegations were false.

In 2012, former Malibu store manager Michael Bumblis sued Charney for wrongful termination, alleging that the CEO had assaulted him physically and with ethnic and homophobic slurs.

The case is currently under appeal by American Apparel. But Bumblis' attorney Ilan Heimanson said his client feels encouraged by Charney's firing.

"He feels vindicated and that justice has partially been done," Heimanson said. "This is not something you expect your boss and the CEO of a publicly traded company to do."

The board voted 5-to-0 on Wednesday to terminate Charney after its annual meeting, the source said.

A different source, an American Apparel executive, who spoke anonymously for fear of reprisal, said Charney was struggling.

"He's an eternal optimist and a very passionate person," the executive said. "Every fiber of his being, every waking second is American Apparel. No one's expecting him to walk away and take a lifelong vacation."

In 2013, American Apparel reported a net loss of $106.3 million, compared with a loss of $37.3 million in 2012. Facing a cash shortfall, the retailer in March sold $28.6 million of stock to meet debt payments.

The Charney termination could trigger defaults under credit agreements with Lion/Hollywood and Capital One Business Credit Corp.

As of March 31, American Apparel owed Lion/Hollywood $9.9 million, a loan that matures in 2018, according to filings. The company also owed nearly $30 million to Capital One in a revolving credit facility.

The company is seeking a waiver from the lenders to prevent any default but warned that it has "no assurance" one will be granted on terms the company can accept, if at all.

Private equity firms, especially those with other retail holdings, could start circling soon, analysts said. The company also may face lawsuits from creditors and shareholders who worry that Charney's departure may hurt the company.

"Everybody recognizes that American Apparel wouldn't be as relevant or iconic a brand without him, having really been the spark and energy behind it," said Todd Slater, managing director at Threadstone Advisors. "I will always have admiration for the iconic brand that Dov created, but sometimes he was his own worst enemy."

(Charles Fleming of the Los Angeles Times contributed to this report.)

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Shan Li, Andrea Chang and Tiffany Hsu Los Angeles Times (MCT)
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