American Apparel Investor Expects CEO to Fight Termination

Jun 19, 2014 12:57 pm ET

(Updates with interim CEO in 11 paragraph.)

June 19 (Bloomberg) -- American Apparel Inc.’s largest outside investor said he expects Chief Executive Officer Dov Charney to fight the company over his firing, which may be the prelude to a sale of the clothing maker.

Johannes Minho Roth, who runs the Swiss investment firm FiveT Capital AG, said he was surprised by Charney’s ouster, which was announced by the board last night in a statement. American Apparel, a Los Angeles-based seller of T-shirts and other casualwear, said it was terminating Charney for cause after an investigation into unspecified misconduct.

“I don’t think this is over,” said Roth, whose firm owns a stake of about 13 percent in American Apparel. “Dov is going to fight very hard. I think he will do a counterattack. I don’t think he will give up his dream.”

When reached by phone, Charney declined to comment. Peter Schey, a lawyer for American Apparel, didn’t respond to a request for comment.

Charney had been leading a comeback at American Apparel, Roth said. The ouster leads him to suspect that “they have a buyer or they want to sell the company,” he said.

“The timing is surprising because as far as I can see Dov did a hell of a job turning around the company this year, for which I’m grateful,” he said. Roth said he hasn’t spoken to Charney or the board yet.

Harassment Allegations

Charney, 45, has fought sexual-harassment lawsuits over the years and raised controversy by using young, scantily clad models in ads. The company also has grappled with slowing sales and mounting losses, in part because of a costly new distribution center that didn’t perform as expected. That left the retailer facing a cash crunch, with an interest payment of $13.4 million coming in April.

FiveT helped the company pay its bills and stave off the risk of default this year when it bought about half the shares in a stock offering. It became American Apparel’s second-largest shareholder -- after Charney, who has a stake of about 27 percent. At the time, Roth praised Charney.

“He’s a visionary,” Roth said in April.

In pushing aside Charney, the board named Chief Financial Officer John Luttrell, a former executive with Old Navy Inc., Wet Seal Inc. and Cost Plus Inc., as its interim CEO. Charney has been suspended and will be terminated for cause after a contractual 30-day waiting period, American Apparel said.

‘No Joy’

“We take no joy in this, but the board felt it was the right thing to do,” Allan Mayer, who has been lead director for the past three years, said in the statement. “Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead.”

Investors applauded the move, sending the shares up as much as 22 percent to 78 cents in New York. The stock, which traded at $15 at the end of 2007, had lost almost half of its value this year through yesterday.

Charney’s exit removes a source of controversy for the company, said Eric Beder, an analyst at Brean Capital LLC in New York. That could help the company deal with Wall Street.

“The Street appreciated what he did with the brand, but he had issues in terms of lawsuits and overall performance of the stock,” Beder said in an interview. “The Street is looking at this as an opportunity for another CEO to help the further improvement, and to run the company in a much more normalized fashion.”

Hostile Environment

In a lawsuit, shareholders alleged that the company failed to prevent a sexually hostile work environment. The suit was dismissed in federal court, and the plaintiffs have appealed.

Separately, a former employee alleged in 2006 that she was subjected to sexual harassment. That led to a finding from the Equal Employment Opportunity Commission that reasonable cause existed that women were subjected to harassment at the company, according to regulatory filings. The company reached a three- year agreement with the employee and the EEOC in August 2013 that governs its administrative measures.

Charney also clashed with Woody Allen after he used the director’s image on billboards, and he was pilloried on “Saturday Night Live” -- with an actor depicting him as a mustachioed lech who didn’t wear pants.

Despite the questions over Charney’s conduct, his firing may have stemmed from the board wanting control before a possible bankruptcy filing, said Roy Sebag, a former American Apparel investor who knows Charney.

The move comes after American Apparel’s latest stock offering reduced Charney’s stake in the company, said Sebag, who is CEO of investment firm Loma Vista Capital Inc. Charney owned about 45 percent of the stock at the end of 2012.

Sebag was part of a group that invested in American Apparel in 2011 through a private placement of shares to help it avoid a cash shortfall. Charney probably won’t sit quietly through this latest challenge, Sebag said.

“He’s a fighter and he’s going to fight for the company,” he said.

--With assistance from Anthony Palazzo in Los Angeles and Selina Wang in New York.