California Apparel News

Three months after Dov Charney was dismissed from American Apparel as its chief executive officer, the founder of the Los Angeles clothing company is seeking $40 million in damages stemming from his termination.

Charney was temporarily suspended from his executive post in June while a special committee investigated allegations of financial misconduct and violations of company policies.

At the end of December, after spending nearly $10.3 million on the investigation, American Apparel’s board of directors terminated Charney as the CEO and ended its relationship with him as a paid consultant.

“There was never any basis to terminate Mr. Charney,” his attorney, Keith Fink, said in an email. “Mr. Charney rejected on multiple occasions significant monetary offers offered by the company to try and sweep his unlawful termination under the rug.”

Long-time apparel executive Paula Schneider, who headed such companies as Speedo USA and Laundry by Shelli Segal, was named as the new CEO.

Charney is seeking $6 million in severance pay, which is based on doubling his $833,000 annual salary plus two times his maximum annual bonus of $1.45 million and the bonus for 2014 as if it were fully earned.

Charney is seeking $1.3 million in accrued vacation-time pay, at least $10 million in emotional distress and 13 million American Apparel shares tied to his performance, according to a March 19 letter provided by his attorney.

The letter also states that Charney still has “priceless art” located inside the American Apparel building on Warehouse Street in downtown Los Angeles, which has not been returned to him.

Charney’s attorney has filed an amended demand for arbitration. “The arbitration was filed on or about June 23, 2014. It was then put in ‘abeyance’ while Mr. Charney was still working for AA [American Apparel],” Fink wrote in an email. “The company has been aware of the extant termination claims since June. We just informed the arbitration association the matter should move forward.”

But American Apparel believes it will win in arbitration. “These claims are baseless, and we are confident that Dov will lose on each and every one of these,” according to a company spokesperson, who didn’t want to be identified.

News of the arbitration demand comes as American Apparel revealed its fourth-quarter earnings results for fiscal 2014. Net loss for the quarter was $28 million on $153.5 million in sales compared with a net loss of $20 million on $169.1 million in sales for the same period in 2013.

Also, at the time of the financial filing, the company revealed that the Securities and Exchange Commission is investigating events surrounding the special committee’s investigation into Charney and his subsequent dismissal.

All this legal drama comes as American Apparel fights to turn around the company that has had net losses amounting to more than $340 million in the last five years.

The company announced it recently received a $15 million loan from hedge fund Standard General—which loaned money to Charney to increase his share ownership from 27 percent of the company’s outstanding stock to 43 percent. The Standard General loan will help American Apparel make a $14 million interest payment due in three weeks.

Charney founded American Apparel in 1998 in downtown Los Angeles. It soon became the largest apparel factory in the United States, making blank T-shirts and then expanding to all kinds of apparel categories.

The downtown location employs more than 3,000 garment workers while other divisions and the company’s 239 retail stores in 20 countries employ another 7,000 workers.