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American Apparel shareholder sues Charney, board members

American Apparel lawsuit: shareholder accuses Charney and board members of ignoring duty to company

An American Apparel shareholder is suing Dov Charney and the remaining six members of the American Apparel board, alleging breach of fiduciary duties to the company and shareholders.

The lawsuit, filed in federal court in Los Angeles on Monday, alleges that Charney engaged in "egregious" conduct by misusing corporate assets and violating the company's sexual harassment and anti-discrimination policies.

Board members were aware of but chose to disregard Charney's behavior "despite numerous red flags," and failed to properly supervise the Los Angeles retailer's management or internal controls, the suit alleges.

The red flags included the company's sharp drop in share price, increase in borrowing costs, and its near delisting on the New York Stock Exchange, the complaint said.

"The Board failed to take action because Charney, as the largest shareholder of American Apparel, was largely responsible for their attainment and retention of their Board seats," the suit said. "By turning a blind eye to the negative impact of Charney's conduct at the Company, the Board permitted the damage described herein to the Company's operations, financial position and reputation."

Lawyers for Tammy G. Federman, an American Apparel shareholder in Texas, filed the lawsuit.

The American Apparel board fired Charney as chairman and suspended him as chief executive on June 18 pending "an ongoing investigation into alleged misconduct." The vote immediately suspended him, but under the terms of his employment contract, a 30-day wait is required before termination.

That firing was long overdue, according to the lawsuit, which cites a letter given to Charney informing him of his suspension. In the letter, the board chronicles Charney's various misconduct over the years. Those included allowing the posting online of nude photos of a former worker who was suing him, and refusing to attend and then interrupting mandatory sexual harassment training for company employees.

Charney has been dogged for years by harassment lawsuits and accusations of inappropriate behavior with employees. Some of the cases have been settled.

The lawsuit Monday also faulted board members for failing to secure the company's future when they finally moved to fire Charney. Specifically, the suit accuses the board of not taking steps to avoid triggering a default on a $10-million loan from Lion Capital, which could also throw a separate $30-million loan into default.

Lion Capital has been threatening to call its loan. A provision in its lending agreement with American Apparel allows the London investment firm to ask for immediate repayment if Charney no longer serves as CEO.

"The Board knew or should have known of these provisions and had ample opportunity to work out a satisfactory arrangement to avoid default," the lawsuit alleges. "By failing to take such measures ... the Board has created a risk that American Apparel will become bankrupt or insolvent."

Follow Shan Li on Twitter @ShanLi

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