Dov Charney was feeling pretty good when he entered the conference room high up inside the Skadden Arps offices in Times Square. He was going to tell his board of directors — perched at eye level with the rooftops of Manhattan’s forest of midtown skyscrapers — that for the first time in years American Apparel’s troubles were behind it.
It was June 18, 2014, and as CEO, Charney had just generated a record year of revenues for the fashion retailer — $US634 million, an increase of 3% — and same-store sales were up 3%, too.
He had also fixed problems at a massive product distribution center that had crippled the company’s supply lines for months, crushing sales and driving up expenses.
His lawyers had settled or dismissed several lawsuits from former employees and models alleging that Charney had sexually harassed them. One suit, which alleged Charney kept a model locked in his house for sex, even turned out to be bogus.
And he had staged a public offering of new stock that had raised $US28.5 million, saving the company from bankruptcy.
There was nothing but good news to deliver.
So Charney, carrying a new running shoe he had designed, began the meeting with a presentation about how he was going to launch a line of sneakers. He laid about six of them out on the table. Within seconds he was interrupted by Allan Mayer, American Apparel’s board chairman.
Mayer pushed the shoes aside.
“Look, there’s something else we want to talk about,” Mayer said, according to a source who was in the room. He passed a couple of pieces of paper over the table to Charney.
It was a termination letter. The board was firing Charney, the company’s founder and CEO, who had led American Apparel for 25 years.
The memo, which was later filed in court, alleged a long list of misdeeds by Charney: he allowed an employee to publish a blog defaming other former employees; he had given severance packages to several employees in order to stop them from suing; he refused to attend sexual harassment training; he used company money for personal expenses such as providing travel for family members. All of the above had significantly increased the company’s legal and insurance bills, the letter alleged: “You engaged in conduct that repeatedly put yourself in a position to be sued by numerous former employees for claims that include harassment, discrimination and assault.”
“It was clear he was totally blindsided by this, he didn’t have a clue,” one person who was in the room says.
Charney went ballistic: “This company will fall apart if I’m not running it!”
Hedge funds and porn stars
This story is based on multiple accounts from people close to Charney, the board, American Apparel employees, and the company’s major shareholders. Several lawsuits have been filed over Charney’s removal, and evidence alleged in that litigation has been used to tell this story too. Business Insider has also seen confidential documents, emails, photos and texts associated with the litigation. Because of the fierce fighting — Charney has filed four lawsuits, and two employees and the company have all filed one each — no one wanted to talk on the record for this story.
But people had plenty to say privately.
What follows is an account of how the tide inside American Apparel began to turn against Charney in January 2014. It details how the board held secret discussions for weeks as it agonized over whether to get rid of him. It describes how his CFO allegedly sketched out a plan to oust Charney, and how that sketch was then obtained by Charney’s loyalists and used as evidence of the coup. (The plan has since been described in court filings.) And it describes how Charney was persuaded to sign a disastrous settlement that left him with no job and no control of the company, despite being the largest shareholder.
Today, Charney is distraught, enraged, humiliated, and vengeful.
For years, he was the crown prince of the sexiest fashion company in America. He socialised with the hedge fund executives who funded his company. He did photo shoots with porn stars. His marketing budget was one of the largest in the retail apparel business. His ads made headlines because they used ordinary women instead of professional models (and because they walked the line in terms of nudity).
His girlfriends were the women in those ads, and many of them were decades younger (he’s 46). He was a millionaire. He owned a beautiful house, high on a hill in Silver Lake, with a balcony overlooking the Los Angeles skyline. He was an impish, mad genius, whose real life was like a male midlife-crisis fantasy.
In person, Charney is by turns infuriating, charming, and arrogant. He can cycle through manic and depressive phases within a single sentence. His retail empire was built with his own hands, in round-the-clock workdays, across three decades. Everyone who knows him agrees the success of American Apparel is 100% because of Charney. He is the epitome of hard work, old-school Jewish garment-trade moxie, and the American dream, all rolled into one.
But that wasn’t enough to protect him.
Secret dossier of sexual liaisons
It started with a board-commissioned investigation into Charney’s activities as CEO, conducted without his knowledge, which lasted four months. That probe eventually led to the creation of a dossier that has yet to be made public.
It has only been seen by a few people inside the company, but two board members recently described some of it in court filings, and it is explosive. It allegedly details “Charney’s use of electronic storage media belonging to the Company for personal purposes to graphically document his sexual liaisons,” some of which occurred in his office. The company has alleged in court that it includes his personal, texts, emails, and photos. It also allegedly includes evidence of a police complaint filed by one model who claims she was sexually assaulted by Charney — a claim he denies. He was never charged.
Charney believes he is the victim of a conspiracy, a palace coup in which his board filed false disclosures to the SEC saying they supported him as CEO while they were actually manoeuvring to oust him. Charney also argues that the investigation was biased because it was conducted by people who wanted him out, and that he has never been charged with any crime or found guilty or liable for any of the accusations against him.
The board has yet to make the photos and messages public.
The SEC, in March of 2015, said it is investigating the company and its termination of Charney. The board denies wrongdoing. The outcome of the federal probe could be crucial in determining whether Charney can get his company back.
Since he was ousted, sales at the company have gone into freefall and it again faces bankruptcy.
“All of you are cowards. Every single one of you.”
In the conference room in New York, Charney began to read the termination letter, and make line-by-line protests against its allegations. After about an hour he texted Iris Alonzo, a longtime creative director who was working in the hallway outside, oblivious to what was happening to her boss. The text said something like “don’t go anywhere, this is getting weird with these guys.” Charney left the conference room and the pair took a walk down a corridor to another Skadden conference room, where they shut the door.
“They’re trying to fire me, it’s completely illegal, they don’t know what they’re doing, they have no idea how the company functions,” Charney told her, according to sources who heard about it later.
“They’re out of their minds,” Alonzo said. “We are going to get the whole company behind you, the entire management team is behind you.”
Charney and Alonzo spent the next 11 hours on the upper floors of the Skadden tower, begging, pleading and arguing with the board to reverse its position. While Charney raged at his directors, the company’s security team was instructed to shut down his email, cancel his access to the HQ building in Los Angeles, and cut off service to his corporate mobile phone, sources told us.
At one point, during a break in the debate, Alonzo went into the conference room where the board was holed up. She was furious.
“Jesus, this is crazy! Who do you think is going to run this company? You’d need five people to replace Dov,” she said, according to someone who was there. “You’re ripping the heart out of the company — you’re going to destroy the company. You don’t know this business, you haven’t spent more than an hour in the factory cumulatively in the last five years. Who are you, and what do you think you know?”
She ended her tirade by saying, “All of you are cowards, every single one of you.”
Allan Mayer asked her to leave.
“Tense bunch of hours”
Everyone who spoke to Business Insider described the exchanges between Charney and the board as painful to hear. Although Mayer and David Danziger, another board member, had led the movement to prepare Charney’s ouster, they were acutely aware that this was Charney’s company.
The company was his entire life’s work.
“It was a tense bunch of hours. We sat in that room going well into the evening. There was a lot of discussion going back and forth, and none of us really knew how it was going to end,” one person said.
There was nothing Charney could do. The other six members of the board had agreed the night before — without telling him — that he would be fired, a source who knew about it says. The letter was already drawn up and dated.
The board meeting actually only had one real purpose: To present Charney with an ultimatum, according to confidential documents seen by Business Insider: Charney could either accept a $US4.5 million severance package and the new title of “creative director,” for which he would also be paid $US500 per hour. It would not look like he had been fired, merely moved into a new position with the company. The price of that package was that he had to sign over the voting rights to his 47 million shares and resign as CEO.
Or the board would remove him.
“We all love you and we know you are the hardest working guy in the room,” Danziger told Charney. “But we need to reposition the company and this is going to be good for you and the company.”
“You are a genius. You will get over $US100 million out of this and start up a new business,” said Robert Greene, another director, presumably referring to the value of Charney’s stock, if it went up. (Their conversation was later repeated in court filings.)
If he did not accept, the board told him, he would be fired “for cause” and walk out with nothing except his existing stock. The implication, from Charney’s point of view, was that there would be a storm of bad publicity. And, two sources told Business Insider, the dirt the board referred to in its termination letter — the stuff about the sexual harassment and the misuse of corporate money — would be made public if he did not go quietly.
Someone leaks a naked video
During another break, an increasingly desperate Charney called John Luttrell, his CFO, to see if he knew what to do. Luttrell expressed shock at the news. That was an odd reaction from Luttrell, three sources told us, because Mayer — the board chairman — had asked Luttrell earlier in secret if he was prepared to step up as the interim CEO if they got rid of Charney.
Charney — who hired Luttrell in 2011 because he had previously been CFO at Old Navy and Wet Seal — later came to believe Luttrell was the mastermind who had first proposed getting rid of him, months earlier, back in February of that year.
Sources close to Luttrell regard this conspiracy theory as nonsense.
On a bathroom break, Charney also called Minho Roth, an investor who held about 15% of the company’s total shares. “I’m having a breakdown,” Charney told Roth, according to someone within earshot. “These guys are trying to fire me!” By the end of the call Charney felt reassured: They’d put their shares together, kick out the existing board members and make Charney CEO again. Charney owned about 27% of the company, and with Roth’s 15% they only needed a couple of other investors to join them. Charney’s belief that Roth would back him would become crucial later in his fight to regain control of the company, court documents show.
So Charney refused the “creative director” option. Sometime around 9 p.m., a statement went out to the press. The board suspended him immediately and declared its intent to fire him, after a 30-day contractual notice period.
At the same time, a new video of Charney appeared on the internet. It showed him dancing naked in his Los Angeles house, apparently filmed by a friend. No one knows how it got there, or why it was leaked at precisely that time. Charney believes it was a deliberate coincidence designed to humiliate him.
By the next day, Luttrell had been named CEO, replacing Charney (who was technically “suspended”).
“We were really up against a wall”
Most people don’t know that American Apparel came very close to bankruptcy in March of 2014.
The only official reference to it is in the company’s annual report for 2013, and it’s written in the generic boilerplate legalese that disguises the seriousness of what the company was required to warn: “We have experienced negative cash flows from operating activities in the past, and our business may not generate sufficient cash flow from operations to enable us to service our indebtedness or to fund our other liquidity needs.”
The company was running on fumes.
The problems went back years, and historically the company has lurched from crisis to crisis. Charney may have built the company, but he was never able to install a mature operational infrastructure to keep the company running smoothly. Part of the board’s case against Charney was that he never hired or retained the kind of management bench strength that a company of its size needed. A lot of the company’s problems were, ultimately, the responsibility of Charney.
In 2009, for instance, there was an immigration audit of American Apparel’s factory, and up to 1,800 illegal immigrant workers lost their jobs. The manufacturing base of the company had to be rebuilt from scratch. As sales fell, Charney ended up loaning his own company $US8.5 million in cash (and charging 6% interest). A company with a more robust HR department would never have hired those workers in the first place.
Then, over the next few years, the company got stuck in an increasingly punitive debt cycle. In 2009, it received an $US80 million loan from Lion Capital at 15% interest. In 2013, it did another deal with Lion, which carried an upper interest rate of 20%. Those are ridiculous interest rates, higher than many credit cards.
Yet Charney signed off on them.
In 2013, Charney let himself be persuaded into building a new product distribution center in La Mirada, California, costing about $US5 million. It was supposed to automate the way orders were sent out and thus make deliveries to stores and wholesalers faster and cheaper. Previously, product had been shipped directly from the factory with workers carrying it around, by hand, in cardboard boxes and trolleys, “like the 1950s,” one source said.
The distribution center was CFO John Luttrell’s idea. It would require a capital expenditure of about $US5 million but once running would save the company millions every year annually. Charney didn’t believe the company had the resources to do it properly. But he said yes to it anyway, to avoid a conflict with the CFO he hired.
La Mirada turned into a disaster.
The system for ordering the products didn’t communicate with the system for picking the products and packing them in boxes. “It couldn’t ship,” a source who saw it told Business Insider. “It couldn’t ship a package!”
“When I showed up at the distribution center it was such a sight, it was a mountain, a mountain of apparel — T-shirts and socks and belts and every single SKU that we had was in the center of the building on tables in boxes,” a source who saw it said. It was a like a bad laundry day 1,000 times over, just this enormous mountain. I think it was over 100,000 units just left in the center.”
In the summer of 2013 Charney moved into the distribution center — literally building himself a bedroom there so he could work day and night — and spent about three months fixing the place. He got it up and running, but it cost American Apparel a further $US15 million in expenses and lost sales, according to the company’s annual report. The company still booked a record year of revenues but the loss on the bottom line was $US106 million.
By January 2014 it was clear to Charney that the company would not have enough cash to meet a $US13.7 million interest payment on a bond it had issued the year before. The company had reported only $US8 million in the bank at the close of 2013, a razor-thin margin for a business with a turnover of $US634 million. If it were not for the La Mirada center, and the costs of fixing it, the company would have had about $US20 million more on hand — more than enough to meet the $US13.7 million debt payment.
In Q1 2014, sales decreased 1% to $US137.1 million, and same-store sales went down 7%. Charney was losing control of the situation.
“We were in one of our periodic liquidity crunches, and the company desperately needed to raise capital in March with an April deadline,” a source familiar with the refinancing told Business Insider. “We were really up against the wall.”
“I’ve known Dov a long time and he often hears what he wants to hear.”
So Charney and Luttrell, came to an agreement with the board: They would sell about 60 million new shares, and use the money to pay off the debt. With a bit of luck, if sales rose again in 2014, the debts would become less of a problem.
The deal came with a downside for Charney: He owned 43% of the stock, a stake big enough to give him absolute control of the company. But the new stock sale would dilute his stake down to about 27%.
Charney, not wanting to lose his controlling percentage, asked the board for a guarantee that over time his stake would increase back up to 43%. Charney believes he had extracted this promise from the board before the equity was sold.
But that’s not quite what happened. Rather, Charney was simply allowed to believe that he would regain control.
“I’ve known Dov a long time and he often hears what he wants to hear,” one source says. Charney was told “the board won’t consider anything until after the capital raise, but if you come to the board with a plan that’s all worked out and includes some performance metrics, the board will consider it.”
In other words, the board merely told Charney they would think about restoring his stake. The sale went ahead, and it netted $US28.5 million — enough to keep the wolf from the door.
But for the first time in years, Charney no longer had ownership control of the company.
He was vulnerable. But he wasn’t concerned because American Apparel’s seven board members — his bosses, technically — had all been picked by Charney himself.
The board was regarded by outside investors as a cosy, pro-Charney place. These were the people who had heard years ago from the media that Charney was having sex with the models he recruited to appear in the company’s ad campaigns. They did nothing, even when some of the models sued.
One, Irene Morales, appeared on television to accuse Charney of locking her inside his house, and still the board made no moves against him. At other companies, the CEO would have been pushed out long ago if that happened. One source told us, jokingly, that the directors were so inactive the only changes they ever asked for in the company’s SEC disclosures were to update their biographies.
That was why Charney felt confident that before the board meeting in the Skadden tower. Compared to the last few years, he had good news and they should have been on his side.
Charney turns a single T-shirt into a $US600 million empire
Charney started his company as a student in the 1980s, carrying boxes of T-shirts across the border in trucks and on trains from America to Canada, where he lived (hence “American” Apparel).
By the early 1990s his business had morphed into something more serious. It was still a one-man operation, but Charney showed up with his boxes of T-shirts at every regional US fashion trade show, promoting them to anyone who would listen.
In the early 1990s he was pushing a “Girly-T” shirt for girls. This was a sexy, tight, fitted top. He called his brand “Classic Girl.”
The shirt came in only one size. “I saw him at every single trade show,” says someone who knew him then. “If there was a trade show happening, he was there. It was like, one T-shirt style, in two or three colours, in one size. It was a medium, one-sized T. He was like, ‘Don’t worry it will fit a woman from zero to size 8.’ I was like, ‘I don’t get it.’ But he sold it.”
In the early 1990s the fashion was grunge: baggy jeans and huge flannel shirts. By contrast Charney’s shirt was a figure-hugging, fitted look. Charney guessed right. The “girly” T-shirt became a top-seller through the late 1990s and early 2000s, morphing later into the “baby-doll” shirt which was cropped even shorter, as the trend for baggy clothes went away.
The line developed, from a single shirt, into American Apparel — 237 retail stores in 20 countries, and 9,000 employees.
In 2005, Charney began selling leggings. The last time leggings were trendy was in the late 1980s and early 1990s. Back then, leggings were fundamentally underwear and only worn underneath a skirt or with denim shorts and boots.
Charney’s idea was to push leggings as outerwear, an alternative to jeans, without the skirt or shorts on top. Again, it was a prescient call. Women were apparently ready to wear butt-revealing underwear as outerwear. Leggings remain one of American Apparel’s best-selling wardrobe basics.
Charney’s brilliance as a trendspotter is his ability to figure out exactly what teenage girls are willing to wear in order to most horrify their parents — and then sell that to them.
This is the effect it had on sales, according to a document filed in the litigation:
Another sex scandal
In 2011, American Apparel ran into another crisis. Charney was sued by four women who alleged sexual assault or sexual harassment. Alyssa Ferguson, Kimbra Lo, Tesa Lubans DeHaven and Irene Morales were all former employees or models for the company. In response, American Apparel published three blog posts detailing private photos, emails, and text messages sent between Charney and the women. Charney’s termination letter alleges he knew these blogs were going to be published.
The posts, which a source said the company officially promoted, appeared on services like Blogger and WordPress. They indicated that at some point the relationships were consensual, and not abusive as the lawsuits claimed. The photos on them were “not safe for work”: In the case of Morales, emails and photos indicated she’d had a consensual sexual relationship with Charney for an extended period. In the case of Lo, a large batch of nude photos was published showing her obviously not being assaulted by Charney. The links were emailed to journalists who regularly covered the company.
This PR retaliation, using personal, intimate photos was an unheard of tactic for a publicly traded corporation. Companies usually prefer to litigate quietly until such cases go away.
So the suits became huge news. Morales and Lo even appeared on NBC’s Today show to press their case. The company called it a “shakedown.”
For a while, the cases went quiet. They were kicked out of the courts and sent to binding arbitration, a confidential non-judicial process governed by the terms of American Apparel’s employment contracts.
Some of Charney’s biggest defenders within the company are actually women. They regarded the plaintiffs as cynically taking advantage of consensual relations with Charney that had not turned out to their satisfaction. Charney was single, and dated a lot of women, and while that was not to everyone’s taste it wasn’t a crime, these female employees say. They sympathize with Charney.
Three female employees spoke to Business Insider. One said, “He has really been taken advantage of by women, who have taken advantage of the legal system, and the kind of power a woman can have in a sexual situation. I’ve known almost every woman who has filed against Dov and it’s digusting. It’s such a hard thing for someone to defend themselves about. Everyone thinks he’s a pervert … he’s got this reputation he’ll never be able to live down, and for him to speak out and deny it, it’s almost impossible [for him].”
The headlines were scandalous but the board didn’t think it needed to act.
“There was a lot of rumour and innuendo. You don’t fire the CEO of a public company based on rumour,” one source said.
And the legal cases kept coming to nothing, another source said:
“There had never been a finding of fact. He always denied them very convincingly. He was an easy target because he was very unconventional and outspoken. He was an easy target for allegations that weren’t necessarily based on anything real. At the time, there was nothing solid for the board to act on. No court of law, civil or criminal, had ever found he had committed an act that he had been accused of.”
But that changed in the early part of 2014.
A model wins an arbitration hearing
At some point after the New Year of 2014, someone went to board chairman Allan Mayer and director David Danziger, who were both on the board’s audit committee, and told them to take another look at the legal settlements that were being made in the harassment cases.
A pattern had emerged in the litigation: The cases would be filed in court. Charney’s lawyers would argue that the women had signed employment contracts that required “binding arbitration,” like an employment case and not a state court case. Arbitration is a non-public labour management process that generally produces much smaller damages awards than a trial by jury does. The process is also conducted in private, shielding it from the media.
Once inside arbitration, Charney’s lawyers would then show that the women had signed agreements releasing Charney and the company from all legal claims. These releases helped the company get the cases thrown out completely, two sources close to the board say.
Business Insider spoke to two employees who said they had signed such releases. They signed them after receiving bonuses or pay raises, and didn’t think they were unusual. Many people in the company were asked to sign releases promising they had no reason to sue the company, in order to get paid.
In 2014, the strategy stopped working.
More than one case ended up being settled. In 2014 and 2015, American Apparel paid a total of about $US4.5 million to settle claims, according to the Wall Street Journal. Ferguson was awarded $US1.8 million, according to court documents. (The sum is disputed by Charney’s lawyers who say it was actually much lower and handled at the insistence of the company’s insurance company.)
Two other settlements were made that were confidential.
In the spring of 2014 — just as it was dawning on top management that the company was not going to be able to make its April bond payment — American Apparel paid at least $US700,000 to settle with Irene Morales, according to court documents. Morales was the 17-year-old model who had alleged she had been briefly locked inside Charney’s house — with the New York Post calling her a “sex slave.”
But the settlement wasn’t over Morales’ sex claims. Those were rejected. Rather, the arbitration judge decided that the blogs which published her personal communications with Charney amounted to an impersonation of Morales.
Sources told Business Insider that American Apparel staff had decided to create the posts based on advice from the company’s lawyers. They were written with Charney’s knowledge, according to the board’s termination letter (and a source told the New York Times the same thing). Charney was getting massacred in the media. It seemed only fair to hit back with the truth — the women’s own sexy texts and emails to Charney, sources close to Charney say.
Charney resisted the plan, according to a lawyer who advised the company. That lawyer was deposed during the litigation, according to a court document seen by Business Insider: “Everybody close to him was pressuring him. Everybody. … I mean, Dov was sitting on photographs and emails … that completely refuted their allegations and he was not releasing them for personal reasons. They were private. He only did it after Kimbra Lo made her appearance [on TV], and after that the media coverage was just out of control.”
The legal advice — to publish the blogs — turned out to have huge unforeseen consequences for Charney: It made the company “vicariously liable” for the posts, the arbitration judge said.
That finding of vicarious liability and the settlement that went with it — along with the news that staff were routinely being asked to file claims releases — was the turning point, two sources close to the board told Business Insider.
“It was really outrageous, anytime someone got a raise or bonus or was leaving the company and getting severance, in order to get a paycheck they had to sign a release of all claims against the company,” a source familiar with the board’s thinking said. “If the board had been aware of that we would have put a stop to it.”
So, in March 2014 the board assigned Jones Day, a law firm, to investigate Charney without telling him. It had to be secret because if Charney had known, the board believes, he would have interfered or stopped the probe. Jones Day pulled all the legal files on Charney and began quietly interviewing employees.
What they found was not good.
Someone finds a secret plan to fire the CEO sitting in the office printer’s out-tray
The legal bill for the Morales case was the least of American Apparel’s problems.
A 2013 bond offering had left the company owing 13% interest with a 2% payment-in-kind, or PIK, on roughly $US200 million in debt, due in April 2014. (A PIK is a type of deterrent provision installed in risky loans when the lender believes the borrower might not be able to make the basic interest payments.)
So CFO John Luttrell attended the ICR XChange conference at the Ritz Carlton in Orlando, Florida, in January of 2014, to listen to new financing ideas. ICR is intended to provide a meeting place where analysts, companies and bankers can float investment plans, no matter how wildly speculative they may be.
Luttrell could not have been a more different personality than Charney. Luttrell was an older, bookish accountant who preferred to spend time on his ranch in Sonoma, with his dog Jon-Jon and his horses. He arrived at the office with his shirt half-untucked, sources say, a crime at the fashion company. He was quiet and would leave the office early or work from home on Fridays, sources say, while Charney often worked late into the night.
He didn’t fit in.
The ICR conference — with its talk of bonds and cashflow and balance sheets — was much more Luttrell’s speed.
At the conference, Luttrell allegedly spoke to two investment bankers from Peter J. Solomon. Marc Cooper, one of the Solomon bankers, was overheard telling Luttrell that “American Apparel could be sold, but not with Dov Charney in the way,” according to court papers.
Luttrell floated the idea past Charney, calling him one morning to ask if he would ever consider taking $US100 million for his stake in the company. Charney wasn’t interested.
On February 14, Luttrell sketched out a plan, typing it into a Word document. It was titled “Notes to David Danziger,” the board member. Much of it has been quoted in court documents. Those who have seen the document say it contained a bullet-pointed list of problems with Charney, “who was incapable of managing a $US700 million business.” It ended with a proposed plan: “Remove CEO and replace with an interim replacement. Put the Company up for sale. Engage Peter Solomon.”
“This piece of paper had Dov’s name on it, other people’s names, some points of why maybe he shouldn’t be in charge, what’s been going on, the financials and La Mirada,” says a source who read it. “Points of how things weren’t right there. Dov was to blame for La Mirada, Dov had hired people that shouldn’t be in charge of things, the financials, basically a rap sheet blaming Dov for a lot of things that had gone wrong with the company. It was two pages and the last point, on the last page, was ‘solution – Jay Solomon taking over American Apparel.'”
The paper also named people who had allegedly slept with Charney, three sources told Business Insider.
In fairness to Lutrell, the idea that American Apparel might be better off without Charney was not an unusual belief in the investor community. The stock had peaked at $US15 in late 2007, but by 2014 it was worth less than a dollar and in danger of being de-listed from NASDAQ, all under Charney’s reign. CFOs have a duty to shareholders, and one way to boost the stock would be to shop the company with a new, turnaround CEO. That may not have been to Charney’s taste, but it’s not an unreasonable argument.
Luttrell kept the memo a secret for months. Charney believes he used it as a primer to persuade board members like Danziger and Mayer that the company would be better off if it was sold without Charney.
The note was discovered by accident, sitting on a company printer by an employee loyal to Charney. News of its existence spread quickly within the company’s gossip mill.
“Woah, where did you get this?” Charney said when he received a copy of it, according to sources inside the company. “This is crazy!”
The employee also told Luttrell’s secretary that she had it. Immediately, Luttrell came over. “Has anyone else seen this?” he said. He was told no. “OK, keep it that way,” he said. Luttrell then took the note and walked off, according to employees who witnessed the action.
Tensions between Luttrell and Charney were coming to a head even before the note was printed. Luttrell “was just telling the chairman of the audit committee [David Danziger] that he was fed up, he wasn’t going to issue another ’10-Q’ as long as Dov was CEO,” according to a source who overheard the conversation.
A 10-Q is the quarterly earnings statement that all public companies must file with the SEC. If a company fails to file, it appears to investors that something must be very wrong — and that usually tanks the stock. Refusing to file a 10-Q is the most serious threat a CFO can make, short of going to the SEC as a whistleblower.
The spring 2014 10-Q was filed on time, however.
The company’s next SEC disclosure was much more crucial, and Charney now alleges in court documents that the company filed false information inside it — a potentially criminal offence under US law that can carry a prison sentence, if proven to be true.
On April 28, 2014, the company filed its “proxy” form, a notice to the SEC announcing its annual shareholders meeting, scheduled for June 18 at Skadden in New York. The form specifically recommended that Charney stay on as combined chairman and CEO.
Charney believes that statement is false because the board had already assigned Jones Day in March to investigate him, and because John Luttrell’s February note shows he wanted Charney fired.
Sources close to the board see it differently. Luttrell’s note is meaningless, they say. Even if Luttrell wanted Charney out, there were six other board members who needed to make that decision.
“This notion that John is somehow been pulling the strings since February is nonsense,” one person says.
And the board wasn’t going to make a decision until after Jones Day finished investigating. When the proxy was filed, no decision had yet been made, they say, and thus it is not false. Jones Day only presented its findings to the board after the proxy was filed. “I can’t tell you how close to the wire we were even on making the final decision. So timing a had a lot to do with everything,” one source says.
And it wasn’t Luttrell’s note that persuaded the board Charney had to go — it was the legal liabilities arising from the sexual harassment suits, the board now says.
The war room in Hell’s Kitchen
After he was fired, Charney decided not return to LA. He was locked out of the building anyway. He chose instead to stay at the apartment of Iris Alonzo in New York’s Hell’s Kitchen neighbourhood, turning it into a war room from which he would fight the board. He immediately began working on a plan to get his company back — after all, he still had 27% of its stock.
He needed more investors to come over to his side. If he could put together the votes from 51% of the stock, he could force the board to make him CEO again.
He called Minho Roth of FiveT capital, a longtime Charney supporter who owned about 15% of the stock. Charney was confident that Roth would be on board because of their previous phone call the night he was fired. But Roth had talked to David Danziger, the board member, on June 20. Roth wanted to know why Charney had been fired two days earlier. But Danziger wouldn’t go into details, hinting ominously that “Roth that would understand the decision if he knew what the board knew,” Danziger later wrote in a court document.
Roth decided then he would not support Charney in the fight.
This devastated Charney, who believes that Danziger scared Roth away by slandering him, an accusation that Danziger is disputing in court.
Charney heard next from Standard General, a hedge fund that had offered to lend the company money back in March (before the company chose instead to sell the stock that diluted Charney’s controlling stake). Charney had a phone conversation with Robert Lavan, an analyst at Standard General, who was on vacation, climbing Machu Picchu in Peru.
When Lavan got down from the mountain and got a signal on his phone, he discovered that Charney was freaking out about the “conspiracy” to fire him and frighten away his investors. Lavan tried to reassure him: He would fly back to New York, and the guys from Standard General would see what they could do. Lavan sent Charney a picture of himself on the summit of the Peruvian mountain with its ancient ruins in the background. “If I could do this, we can definitely take back APP,” his email said.
A day or so later, Lavan and another Standard General member, David Glazek, came over to the Hell’s Kitchen apartment to find a dishevelled-looking Charney who had not slept properly for nearly a week. They hammered out a deal: It was basically a cash loan with warrants attached that required Standard General be paid back with Charney’s stock. The terms were complicated, but essentially Standard General would lend Charney a massive amount of money — up to $US20 million — and Charney would use that money to buy stock, building a combined stake up to 51%. Charney’s stock would be the collateral for the loan.
In addition, they signed an agreement about how to control the voting rights to the stock. The agreement gave Charney and Standard General “negative control,” meaning that one party could veto the vote if they didn’t like what the other one was doing.
The deal was signed at 2 a.m. in the morning.
On its face, this was good news for Charney. He began buying the stock, adding to his warchest. If he could get 51% with Standard General’s backing, he would be able fly back to LA, kick out the board, and declare victory.
Charney only realised later that he had made a horrendous mistake.
The poison pill
For a while it looked like Charney might succeed. He built a stake back up to around 43%. But the board wasn’t stupid. As soon as they realised Charney was getting close to ownership control again, they adopted a “poison pill.” Basically, the pill was a policy that promised to reward any investor with extra, free stock if anyone accumulated more than a certain percentage of the whole. That meant the more stock Charney bought, the more diluted he would become. The board also declared that Charney’s pact with Standard General was invalid. (It probably didn’t have that power but the declaration was enough to potentially tie up Standard General in litigation for months.)
So Standard General approached the board and said, “hey, can we work this out?”
They came to an agreement: Standard General would get three seats on the seven-member board, and two more seats jointly agreed with the company. Charney would resign from the board. That basically gave Standard General control of the company.
They also agreed that the board would let another outside company, FTI, complete a second, more thorough, investigation of Charney, and his suitability to be CEO.
Charney thought this new agreement was a huge betrayal. The company spent $US10.4 million to fund lawyers for the probe (according to its annual report), which operated like a prosecution; Charney ended up using his own money to hire lawyers to defend himself against it.
And in addition to not being CEO, his stock was now controlled by a hedge fund who could veto his votes.
He was completely screwed.
A kabuki dance in Central Park
Charney believes he was hoodwinked into this agreement by Soo Kim, Standard General’s managing partner, he has alleged in court documents.
Kim allegedly achieved this by calling Charney at 5 a.m. on the morning of June 30, and insisting that he meet “at a private location in Central Park” where “no one could hear us talking” to discuss signing a deal with the board, Charney claims in court papers.
Charney rolled out of bed and took an Uber car uptown. At about 5:30 a.m., Charney found Kim in “freak out mode” near the park, according to Charney’s lawsuit. One of Standard General’s limited partner investors, PAAMCO, had pulled $US300 million from Standard General because it did not want to be associated with Charney, the suit claims. “Kim was scratching himself ‘to a bleed’ in panic”, the suit claims. According to the lawsuit, Kim persuaded him that the second investigation was merely a “kabuki dance” and that once it was over, the dust would settle and Charney would be quietly re-installed at Standard General’s request.
Charney agreed to sit tight, thinking he would become CEO later.
It didn’t happen.
Needless to say, Standard General does not agree with Charney’s version of events. This wasn’t a secret meeting in the park, sources say. Their office faces the park, from 5th Avenue and 59th Street. Kim and Charney met for coffee outside the office and happened to sit down on a park bench. And it wasn’t called because Kim was trying to string Charney along — Kim was angry at Charney because he kept telling the media that Standard General was backing him no matter what. That was wrong, Kim told Charney. They would only back him if the investigation cleared him.
From Standard General’s point of view, the board’s investigation into Charney was the unknown variable in the deal. They had no idea what dirt the board was holding.
There were two possible outcomes to the investigation, and in either Standard General had something to gain:
- Either the investigation would exonerate Charney, in which case Standard General would be able re-install him as CEO.
- Or it would show that Charney had committed misdeeds that would prevent him from being CEO. In the second scenario, Standard General would at least retain its seats on the board, allowing it to safeguard the massive amount of stock it now controlled but could do nothing with. Maybe, in that scenario, the stock would go up.
The disagreement was that Charney believed Standard General would back him as CEO regardless of how the investigation turned out. The new investigation was bogus — it was being done at the behest of people who had already decided he should fired — and Standard General knew that, Charney believed. Why else would he have signed the “negative control” deal? Why else would they have loaned him the money?
Charney’s argument is irrelevant, sources told Business Insider, because even if Standard General backed Charney unconditionally there is no way he could be CEO if there was a trove of evidence against him alleging he misused corporate funds and exploited female employees for sex. American Apparel was already being forced to take awful interest rates on its debt because traditional lenders didn’t like the rumours surrounding Charney. What if the rumours were true? What if the files from the investigation became public? You just cannot be a CEO of a publicly traded company with that hanging over you.
The probe was essentially out of Standard General’s hands, these sources argue.
With the agreement between Standard General and the board signed, Charney’s fight to regain his company officially reached a legal “standstill.”
On December 15, the board reviewed FTI’s findings, and fired Charney a second time. This time it wasn’t technical.
He was gone for good.
Investigators discover Charney’s private porn stash
Charney believes his legal battle — or perhaps the SEC probe — will result in him getting his company back.
But the board has made it clear that it is holding a sword over Charney’s head: After the two investigations by Jones Day and FTI, the company took possession of a private company server that was used by Charney to store his personal archive of photos. It allegedly includes a ton of sleazy communications between Charney and his female models and employees. The investigation also allegedly found evidence that corporate money was misused.
Charney denies that, and believes the company is trying to smear him.
Charney launched four lawsuits against the company, its board, and Standard General in an attempt to get his company back. On August 13, 2015, two board members filed papers in one of the cases giving more detail about what the investigations found about Charney.
David Danziger alleges that Charney was fired in part due to “Charney’s use of electronic storage media belonging to the Company for personal purposes to graphically document his sexual liaisons.”
Chairperson Colleen Brown goes into even more detail. The company “discovered videos and photographs of Mr. Charney engaged in all manner of sexual behaviour with numerous models and employees, which for some incredible reason had been saved by Mr. Charney to the Company’s network server by him with the use of his Company computer,” she alleges.
“These emails and text messages reveal that Mr. Charney repeatedly sent illicit messages to employees. He sent messages that included pornographic videos (or links thereto), pornographic photographs and other nude pictures. Additionally, he frequently engaged in inappropriate sexual banter, infantilizing women and referring to himself as ‘Daddy,'” she alleges.
Her filing then quotes from those messages, and they allegedly describe Charney’s sexual fantasies in lurid, four-lettered detail.
The server was supposed to be for Charney’s private use, and contained his personal photos. The historic photo archives of fashion and media companies can often be valuable. Hugh Hefner has one, for instance, and it’s probably worth a lot of money. Founder archives can be sold for hundreds of thousands in media deals. There are rumours that Entourage’s Adrian Grenier wants to make a movie of Charney’s life, so all those old pictures could be part of that. Charney will likely argue that he had an agreement with the company that the server be kept separate and private: the messages on it were consensual, and not intended to be seen by the public, and it is thus unfair for the company to break that agreement and publish them.
There’s an implicit threat from the company here, too: the subtext directed at Charney seems to be, go away or all this information will become public, including the photos.
Charney’s prediction comes true
American Apparel appointed Paula Schneider as its new CEO in December. She has cleaned house. A dozen or so of Charney’s internal loyalists have lost their jobs.
Since then, the prediction Charney made about the company at the board meeting in 2014 — that it would collapse without him — has come true: American Apparel is in a death spiral. The company moved away from its overtly sexual marketing toward a positioning that focuses more on the clothes. Its ads are now less offensive to many, but less distinctive, also.
Sales are down, collapsing 17.2% to $US134.4 million in Q2, as a result. That followed a 9% decline the quarter before.
On August 11, the company disclosed it was not able to file an earnings report for Q2 because it might be unable to make payments on a credit line it has with Capital One. Failing to file a 10-Q on time is always a bad sign.
The company may be nearly bankrupt and will definitely need more financing, it said, “Whether or not any such transactions or agreements were implemented or successful, the Company’s existing and any new investors could suffer substantial or total losses of their investment in its common stock.”
They may have gotten rid of Charney, but the price for that may ultimately be the destruction of the entire company.
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