The Full Story Of The Amazing Rise And Predictable Fall Of American Apparel CEO Dov Charney

Dov CharneyMoguliteAmerican Apparel CEO Dov Charney

Yesterday, American Apparel fired its founder and longtime CEO Dov Charney.

The move comes as a shock, because for years Charney has had voting control of his company’s stock and he’s successfully faced down a series of sexual harassment allegations — many of which turned out to be false or have no legal basis. (Charney famously gave the company an overtly sexual image: He was known to have girls in bikinis wash the factory roof.)

Allan Mayer, the company’s newly-appointed co-chairman, told The L.A. Times, “This is not easy, but we felt the need to do what we did for the sake of the company … Our decision to do what we did was not the result of any problems with the company’s operations.” He said the board launched an investigation into Charney’s sex life earlier this year after “new information came to light.”

In the beginning ...

American Apparel was started by Dov Charney while he attended Tufts in the late 1980s.

By 1997, the company moved from Charleston, South Carolina, to Los Angeles. In 2000, American Apparel moved into its current Los Angeles factory. In 2006, the company was sold for more than $US380 million to Endeavour Acquisition Corporation.

Charney stayed on and still runs the company today.

In 2004, concerns about the sexual nature of the company's corporate culture emerged.

Charney gave an infamous interview with Claudine Ko, about the company, Charney, and the women around him.

Ko claimed Charney masturbated in front of her -- multiple times.

What followed were a series of lawsuits from former employees, totaling nine by 2013, regarding sexual harassment, naked pictures, and more. In one of them, filed in 2011, a woman alleged Charney trapped her in his home as a sex slave.

But by the mid-2000s, sales were booming.

2008 was a very good year, until ...

... Charney called his CFO a 'complete loser.'

Ken Cieply resigned a few weeks later and the stock had one of its worst months in history. It would get temporary reprieve, but then suffer with the rest of the markets in the fall of that year.

By December there were still reasons to celebrate a bit: rapid expansion, success in the U.K., domestic praise, and a great online strategy.

And 2009 was not much better.

In March, American Apparel avoided bankruptcy thanks to an $US80 million loan from Lion Capital.

Two months later, it paid Woody Allen $US5 million for using an image of Annie Hall without Allen's permission.

The stock continued to struggle and then it got a lot worse.

1,800 employees were laid off because of their immigration status.

In September 2009, American Apparel let go 1,800 employees after an immigration raid revealed many employees did not have legal status. The layoffs were well over a third of American Apparel's factory staff.

Charney would actually blame American Apparel's economic woes on the immigration raid, although that was just the beginning of what would be a dismal 2010. 'You have this creative guy, me, trying to expand the line when half the sailors were ejected off the boat by Homeland Security. We've got to make button-downs! We've got to make jackets! But all the sewers were new. It was a real comedy.'

In August of 2010, APP was threatened with delisting.

Only a week after announcing it might go bankrupt, American Apparel received a letter threatening delisting from the New York Stock Exchange/AMEX because of delayed second quarter filings.

This came after Deloitte & Touche resigned as auditor because of concerns over internal controls regarding financial disclosure. The month before, the U.S. Attorney in New York began investigating American Apparel.

The turnaround began with a restocking of its management suite.

Dov Charney seemed to accept the idea that American Apparel had become too large for him to run alone. As such, American Apparel began an aggressive overhaul of its executives.

In October of 2010, Tom Casey, formerly of Blockbuster, was made acting president. John Luttrell was named executive vice president and CFO in February of 2011. That July, David Danziger was put on the board while Marvin Igelman was given a seat-in-waiting. In February of this year, Jordan Schiff was hired as GMM and Stacy Shulman was promoted to CTO.

In addition, fashion industry veteran Marty Staff was hired as chief business development officer in early 2011, but left before the end of the year. Casey left later in 2011, too. Both departures confirmed that Charney was still not an easy person to work with.

Cotton prices started stabilizing.

In 2011, the price of cotton hit record highs thanks to demand, floods in China and Pakistan and other abnormal factors.

'Most fluctuations in our margins relate to efficiency in the factory or if there's a cotton-price spike, like last year,' Charney told Business Insider.

Bankruptcy was still a concern.

In the spring of 2011, American Apparel announced it might pursue bankruptcy. Among the concerns listed: financial losses, lawsuits, cotton prices, labour concerns, and more.

Behind all that lay American Apparel's fundamental, long-term problem: its persistent unprofitability and its debt and liquidity issues.

'The largest of all expenses is interest. We can pay that down itself in cash. With a lot of EBITDA you can do that,' Charney says. 'We can refinance debt. We think we can refinance our debt when we're earning more money. The leverage will be better from the point of view of the banks.'

But 2012 started with sales going up.

The focus on efficiency and streamlining paid off.

Total January sales were up 14%.

In some categories, American Apparel was beating record highs from 2008.

And then George Soros loaned the company $US80 million.

This was big.

All throughout late 2011, the concern regarding American Apparel was how it was going to be able to pay its two creditors, Bank of American and Lion Capital. The answer was George Soros and Crystal Financial.

In March of 2012, Crystal Financial loaned $US80 million to American Apparel, replacing Bank of America, and by most accounts allowed American Apparel to avoid bankruptcy.

Charney even started winning in court.

A New York judge threw out a $US260 million lawsuit against Charney filed by Irene Morales, the girl who claimed Charney used her as a sex slave. A California version of the lawsuit that was forced into confidential employment arbitration -- another legal victory for Charney.

'None (of the remaining lawsuits) are outstanding in a public court right now,' Charney says. 'They're all in arbitration. I think they're all frivolous.'

But then Charney was sued by a store employee who claimed Charney shoved dirt in his face.

The suit, brought in late 2012 by former store manager Michael Bumblis, alleges Charney used racial and homophobic slurs against Bumblis after Charney allegedly discovered Bumblis working for a different company at a Las Vegas convention.

Charney then visited Bumblis's store and allegedly discovered the manager had removed an item from the sales floor that Charney believed was a hot seller. He flew into a rage, and ultimately shoved some dirt into Bumblis' face, the suit alleges.

Charney denied the allegations.

Even the stock began performing: in 2013, it rose above $US1 for the first time in two years.

Investors thought this company might actually grow and add value -- something it hasn't done in years.

But Charney has a habit of diluting his stock in return for financing. The company again said it still needs financing.

In 2012, Charney's top PR man admitted he was a professional liar.

Ryan Holiday

No one had done more to defend Charney's reputation than Ryan Holiday, the top PR man for American Apparel.

And then he published a book, 'Trust Me, I'm Lying; Confessions of a Media Manipulator,' which can be summed up in a quote from its introduction: 'I'm paid to deceive. My job is to lie to the media so they can lie to you.'

Disclosure: Large chunks of Holiday's book make false claims about the staff of Business Insider.

2013: The company enters turnaround territory

In 2013, American Apparel recently reported its first net income profit after 12 straight quarters of losses.

That was an amazing turnaround for a brand which a few years ago was close to bankruptcy; its CEO surrounded by lawsuits alleging sexual harassment.

Now, comparable same-store sales were showing increases of 7 - 13 per cent. Q4 revenues rose to $US173 million. And CEO Dov Charney made good on his promise -- made to Business Insider months earlier -- of booking more than $US600 million in revenue for the year.

Made in America might work out in the long-run.

American Apparel is proud of its massive Los Angeles factory, which might just be the biggest clothing factory in the U.S. For the longest time, there's been one glaring problem -- it's in the U.S.

With an average salary of $US12.00 an hour, making clothes in the U.S. is expensive compared to China, the Dominican Republic, Honduras or Mexico.

Charney cites rising costs in China as one more reason to not even think about leaving. And as The Atlantic pointed out, 'made in America' is a gigantic selling point.

This year, the stock tanked -- again.

APP's price was always low because of Charney's habit of printing more stock certificates for the investors who were loaning him cash. But since February of this year, APP has been in familiar territory: under $US1.

That means the company might get delisted from the New York Stock Exchange -- a humbling move that would officially turn it officially into a penny stock.

Charney sold another $US28 million in stock in Q1 2014 -- further diluting investors.

The company made another loss and sales were stagnant at $US138 million.

The major reason American Apparel is cashflow positive is because of the $US28 million stock sale -- and those extra sales are keeping the stock in the toilet.

This year the board began investigating Charney's sex life -- again.

This sentence from the L.A. Times story is all we know:

Charney's behaviour problems did not appear to be criminal in nature, but involved his personal conduct with women and poor judgement, said a source familiar with the matter.

Charney is a crazy genius.

Dov Charney is hard to work with. Dov Charney gets in trouble. Dov Charney is actually brilliant.

Charney's American Apparel is a brand obsessed with quality. In large part, it's paid off. While profits might not look great, American Apparel has a loyal customer base who have no problem paying $US20 for a plain T-shirt.

The fact that until recently avoided controversy looked like Charney had put most of his troubles behind him.

American Apparel's factory is also quite cool...

NOW WATCH: Briefing videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.