Dov Charney is gearing up for a legal battle against the American Apparel Inc. board that ousted him as chief executive.
In a letter to the board’s counsel, Charney’s lawyer, Patricia Glaser, accused the directors of illegally firing its chief executive and chairman last week. She said Charney planned to pursue legal action against the Los Angeles retailer unless he was reinstated.
Those accusations were dismissed by American Apparel co-Chairman Allan Mayer.
“We’re very confident that we are on very firm legal ground,” he told The Times on Sunday. “It’s what we would expect from Dov’s attorney in a situation like this, but we continue to believe firmly that we did the right thing, for the right reasons, in the right way.”
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.
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.
Glaser’s letter sent Thursday to the board’s law firm, Jones Day, goes into further detail about the drama at the Wednesday meeting in New York.
The board of directors gave Charney an ultimatum: resign from all his positions at the company or be terminated for cause, the letter said.
If Charney resigned, he would be paid a multimillion-dollar severance and stay on as a consultant for the company for four years, the letter said. If he did not resign, he would be fired along with public statements explaining the board’s decision that would contain what Glaser described as “false and defamatory statements concerning Mr. Charney.”
The board gave Charney the choice at noon at the Wednesday meeting, and told him he had until 4:30 p.m. to make a decision, the letter said. The deadline was later stretched to 9 p.m. that same day.
“By presenting Mr. Charney with this absurd and unreasonable demand, the company acted in a manner that was not merely unconscionable but illegal,” Glaser wrote in the letter, which was obtained by The Times. “For one thing, the company denied Mr. Charney any meaningful opportunity to consider his options.”
When Charney declined to resign, the board handed him a termination notice, according to the letter. Glaser wrote that the document allegedly contained “numerous false and misleading statements” involving the investigation preceding his firing and also his job performance.
Glaser said the accusations against Charney are “completely baseless.” She characterized the firing as a fait accompli that failed to give Charney a chance to address performance issues.
“We question the legitimacy and thoroughness of any investigation that did not involve any discussion whatsoever with Mr. Charney,” Glaser wrote. 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.”
Charney’s lawyer said the firing violated the Age Discrimination in Employment Act, which required American Apparel to provide 21 days to consider any proposed severance agreement.
Glaser set a deadline of Monday for a meeting with the board to discuss fully reinstating Charney as chief executive and chairman.
“Unless these matters are addressed immediately, we intend to pursue legal action against the company,” the letter said. The Reuters news service first reported details of the board’s allegations against Charney.
American Apparel and its founder are accustomed to turmoil.
The retailer’s financial position is precarious. It 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 buried in negotiations over financing.
The company has warned that firing Charney could also trigger defaults on nearly $40 million in outstanding loans and throw the company into bankruptcy.
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.
Many industry watchers have speculated that American Apparel is now ripe for a takeover.
Some analysts say that Charney could try to take over the company with the backing of a private equity firm. If he can’t regain control, analysts have guessed that he would sell his 27% stake to another shareholder interested in taking over.
Interim Chief Executive John Luttrell has vehemently denied the possibility that the company would be interested in a takeover.
If Charney decides to mount a fight in court, the board is most likely armed with plenty of documentation uncovered during its investigation of Charney, said Lloyd Greif, chief executive of investment banking firm Greif & Co.
“The board is not stupid. They are not looking to have a wrongful termination suit for tens of millions of dollars,” Greif said. “No one terminates a company CEO unless they dotted their I’s and crossed their T’s.”