American Apparel hit with investor lawsuit

Wed Aug 25, 2010 7:10pm EDT

* Complaint alleges fraud, says company lied about hiring

* Lawsuit is latest headache for brand

SAN FRANCISCO Aug 25 (Reuters) - Edgy clothing brand American Apparel Inc (APP.A) and its executives were hit with a shareholder lawsuit on Wednesday claiming they misled investors about hiring practices after a federal immigration probe.

Although executives initially told shareholders the 2009 investigation by the U.S. Immigration and Customs Enforcement would not have a material impact on the company, the dismissal of over 1,500 workers set in motion a series of operating losses and plummeting profit margins.

The complaint alleges the defendants knew, or were "deliberately reckless in not knowing" that those workers were not eligible to work in the United States.

"When this practice was brought to light ... the true financial condition of the company became known and investors lost tens of millions of dollars as the impact of such practices became apparent," read the complaint filed in federal court in the central district of California.

American Apparel was not immediately reachable for comment.

The lawsuit seeks class-action status and unspecified damages. Executives named as defendants are American Apparel's chief executive and founder, Dov Charney, Chief Financial Officer Adrian Kowalewski, Chief Manufacturing Officer Martin Bailey and the company's head litigation counsel, Joyce Crucillo.

The named plaintiff is Anthony Andrade, a shareholder.

The apparel company, which operates stores in the United States and abroad, has been in the spotlight for over a year since the probe, most recently over liquidity concerns and a string of warnings that debt covenants might not be met. [ID:nSGE67G0GF]

Last month, American Apparel disclosed its accountant, Deloitte and Touche, had resigned. [ID:nN29103163]

American Apparel shares have fallen 76 percent this year. On Monday, the company warned its shares could be delisted from the American Stock Exchange, as it has yet to file its report for its quarter ended June 30. (Reporting by Alexandria Sage; editing by Andre Grenon)

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