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Dov Charney intensifies effort to regain control of American Apparel

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Dov Charney discussing options with supporters, including a shake-up of the company's board and management

Dov Charney intensified the campaign to get his job back at American Apparel Inc., the company he founded that unceremoniously ousted him last week.

Charney, who owns a 27% stake in the company, appears to be positioning himself to take back control of the company through an alliance with other shareholders, as well as to mount a legal battle.

In a Monday filing with the Securities and Exchange Commission, Charney said he is discussing options with supporters, including a shake-up of the retailer's board and management. Some of these supporters, who want Charney back helming the company, are stockholders, the filing said.

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FOR THE RECORD:
American Apparel: In the June 24 Business section, an article about ousted Chief Executive Dov Charney's efforts to regain his job at American Apparel Inc. cited the termination letter as saying that the premium on the company's employment liability insurance had risen to $1 million from $350,000 because of multiple harassment lawsuits. In fact, the company's deductible rose to $1 million from $350,000, not the premium. —

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Charney, 45, also offered to meet with the board and management about the future of the company, which he started in his dorm room at Tufts University.

"This is not a pleasant divorce, and this is his baby," said Eric Beder, an analyst at Brean Capital. "Dov is going to try to get it back."

The board decided Wednesday, after the company's annual meeting, to replace Charney as chairman and terminate him as chief executive. The 5-0 vote immediately suspended Charney, but under the terms of his employment a 30-day period is required before termination.

Monday was the deadline set by Charney's attorney, Patricia Glaser, to meet with the board to discuss reinstating him. In a letter last week to the board's counsel, Glaser said Charney planned to pursue legal action against the company unless he was put back in charge.

As a first step, Glaser said, she filed an arbitration petition Monday with the American Arbitration Assn. against American Apparel alleging wrongful termination, breach of contract and retaliation, among other issues.

Allan Mayer, American Apparel's new co-chairman, said the board does not intend to sit down with Charney.

"We see no point in having a meeting with Dov at this point," he told The Times on Monday.

Mayer added that Swiss investment firm FiveT Capital, which owns a roughly 13% stake in American Apparel, has indicated that it would not support Charney in a proxy fight. The board does not know who Charney's supporters are, he said.

"We look forward to learning their identities," Mayer said.

American Apparel has said the termination "grew out of an ongoing investigation into alleged misconduct."

A person familiar with the matter said the investigation found that Charney allegedly stayed in corporate apartments when he wasn't on business, used company funds to book airline tickets for his parents and helped leak nude photographs online of a former worker who was suing him, among other alleged improper decisions.

The company is also investigating allegations that Charney had a "widespread pattern" of promoting attractive women to jobs that were well beyond their experience and skills, the person said.

Glaser, Charney's attorney, said the board's allegations against her client are "completely baseless," according to the letter she sent to Jones Day, which represents the American Apparel board.

The charges mostly "involve activities that occurred long ago (if at all) and about which the board and the company have had knowledge for years," she wrote.

Also on Monday, American Apparel said it has hired advisory firm Peter J. Solomon Co. to ensure it has access to affordable capital.

Mayer said the retailer has no immediate need to raise additional funds.

Hiring the advisory firm is "simple prudence to ensure the ability to access capital at reasonable rates," he said.

Many industry watchers have speculated that American Apparel is now ripe for a takeover.

A bid could come from Charney, backed by a private equity firm, or a separate investment company or retailer, analysts said. John Luttrell, the interim chief executive, has vehemently denied the possibility that the company would be interested in a sale.

But at least one observer said the board's actions indicate otherwise.

"Despite their protestations they are not for sale, they are taking the actions you would expect to take in anticipation of a sale," said Lloyd Greif, chief executive of investment banking firm Greif & Co. "I bet my bottom dollar they have already been approached" by potential buyers, "which is why they quickly hired an investment bank."

Another sign: The retailer failed to line up a new chief executive before firing Charney, Greif said.

"The fact they moved him out and didn't have a new CEO to slot in tells me they are leaving that seat effectively vacant," Greif said. "The board has left a clean slate for the new buyer to effectively install their new CEO and take the company to the next level."

He pointed to private equity firm Leonard Green & Partners, which promptly appointed a new chief executive after acquiring denim retailer Lucky Brand last year. "I would see a similar situation happening here," Greif said.

Mayer said American Apparel hopes to appoint a new CEO within the next few months.

Corporate drama aside, American Apparel has big hurdles ahead as it tries to turn around its fortunes after years of poor performance and high debt.

The retailer has lost nearly $270 million in the last four years and has more than $200 million in debt, some at interest rates as high as 20%. This year, it fought to retain its listing on the New York Stock Exchange while mired in negotiations over financing.

The company has warned that firing Charney could trigger defaults on nearly $40 million in outstanding loans and throw the company into bankruptcy. The company sold $28.6 million of stock in March to meet debt obligations. It is also facing an interest payment of $13.5 million to bondholders in October.

Charney himself has been accused of inappropriate behavior with employees and has been the target of multiple harassment lawsuits, some of which have been settled.

Those legal problems caused the company to pay significantly higher premiums for its employment practices liability insurance, the board told Charney in a termination letter, which was first reported by the website BuzzFeed. The premium rose to $1 million from $350,000, the letter said, which it described as "well outside of industry standards."

shan.li@latimes.com

Twitter: @ByShanLi

Copyright © 2014, Los Angeles Times
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