American Apparel expects fight from ousted founder

LOS ANGELES Thu Jun 19, 2014 5:51pm EDT

A man walks past an American Apparel store in New York June 19, 2014.  REUTERS/Brendan McDermid

A man walks past an American Apparel store in New York June 19, 2014.

Credit: Reuters/Brendan McDermid

LOS ANGELES (Reuters) - The board of hipster clothing brand American Apparel Inc (APP.A) has ousted founder Dov Charney as chairman and said it was preparing for the controversial executive to fight his removal.

American Apparel replaced the 45-year-old Charney as chairman late Wednesday, citing unspecified allegations of misconduct. It also said it suspended him as president and chief executive officer, and plans to fire him for cause, following a 30-day period stipulated in his contract.

"This is his baby, and he owns 27 percent, so we don't expect him to just walk away," said Allan Mayer, American Apparel's interim co-chairman, in an interview.

Charney "has always said he would never do anything to harm this company, but his view of what's good or bad for this company is very different from ours," Mayer added.

The usually outspoken Charney, who has been the target of sexual harassment lawsuits, told Reuters on Thursday he was not yet ready to speak publicly.

Charney's ouster, which followed the company's annual meeting, came after a four-month investigation by the board's five independent directors into a series of actions it considered detrimental to the company, according to a person with knowledge of the investigation.

The company is also expected to announce it has retained an investment banking firm to provide capital if its lenders declare the company in default on some of its debt, a source said. The company said it may be in default as a result of Charney's departure.

Shares in the Los Angeles-based retailer, known for its often racy billboard ads that feature scantily clad young women, rose as much as 22 percent on Thursday. The stock later eased, adding 7.1 percent to 69 cents in afternoon trading.

"We believe investors will generally view this news positively, given perceived prior mismanagement and the potential for reduced future headline risk," Roth Capital Partners analysts wrote in a note to clients.

SEXUAL HARASSMENT LAWSUITS

Charney started American Apparel's predecessor companies in 1989 and has been at the helm since 2007, when the company went public.

He has faced a series of sexual harassment lawsuits. In one, former saleswoman Irene Morales claimed she was held as a teenage sex slave, forced to perform sexual acts over eight months, including oral sex in Charney’s Manhattan apartment just after she turned 18.

At the time, his lawyers said Morales was trying to "shake down the company." A New York judge moved the case to arbitration.

In a separate claim, Morales and several other woman also said they were forced to pose nude in pictures that later surfaced on the Internet.

American Apparel's U.S.-made, logo-free and comfort-oriented wardrobe staples have a nostalgic aesthetic that has found a following among fashionable urban dwellers.

While many U.S. clothing companies scoured the globe for dirt-cheap labor, American Apparel has claimed it was "sweatshop-free" and boasted its domestic garment workers can earn annual salaries of $30,000 or more, plus benefits.

While the industry lauded Charney for his creativity, the company was under fire for lax financial controls and a perceived weakness on its management bench.

The board named Chief Financial Officer John Luttrell as interim CEO. It also appointed Mayer and David Danziger as co-chairmen.

The 250-store chain has reported losses in 16 of the past 17 quarters. Its long-term debt was $214.6 million as of March 31.

(Reporting by Lisa Baertlein, Ron Grover, Mica Rosenberg, Jeffrey Dastin, Sampad Patnaik and Shailaja Sharma; Editing by Jilian Mincer, Gopakumar Warrier, Maju Samuel and Jeffrey Benkoe)

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