Problems Aren't Over at American Apparel
LOS ANGELES (CN) - Directors of American Apparel endangered the company and failed to prevent CEO Dov Charney from securing a majority stake in the company after he was ousted, a shareholder claims in a federal derivative complaint.
Tammy G. Federman sued Charney and six members on his board on Monday, on behalf of shareholders. She claims that the board ignored Charney's misconduct, including his misuse of corporate assets, abuse of his executive position and allegations that he sexually harassed employees.
Federman claims the board of directors dragged their feet on taking action against Charney because they were worried about protecting their executive positions.
Now a majority shareholder, Charney has been sued for sexual harassment several times in recent years.
On June 18, according to the new lawsuit, the board made an offer to Charney that would have allowed him to stay at the company as a consultant for $1 million a year. After that deal expired in 2018, Charney would have left the company.
"It was only after Charney rejected this offer that the board took steps to terminate Charney's board position and employment," the complaint states.
That same day, the board suspended Charney, Federman says, after accusing the CEO of failing to block an employee's plan to post nude photos of one of his alleged sexual harassment victims online.
"The board noted that an arbitrator awarded damages against American Apparel based on this incident, which was reported by The Wall Street Journal to be $700,000, and that American Apparel would probably be forced to settle similar claims, costing the company more money," the complaint states. "The board accused Charney of allowing the employee to post these pictures because it was personally beneficial to him, even though it harmed the company."
American Apparel had to pay increased insurance premiums because of arbitration awards and legal costs in defending sexual harassment claims against Charney, Federman says. She claims that the company's insurance premiums increased from $350,000 to $1 million per year.
Charney was accused of handing out severance packages and bonuses to ex-employees to avoid liability for sexual misconduct, the 21-page lawsuit states.
"The board caused further damage to American Apparel in the way it took steps to terminate Charney by failing to ensure that this action did not trigger a repayment acceleration of its loan with Lion Capital LLC (Lion). By failing to successfully get this repayment acceleration provision waived before it met with Charney on June 18, 2014, the board risks American Apparel becoming bankrupt or insolvent," the lawsuit states. (6)
Citing news reports, Federman says that if American Apparel defaults on its $10 million loan with Lion it will also default on the $50 million line of credit it has with Capital One Financial, depriving it of access to $20 million.
"The board knew or should have known of these provisions and had ample opportunity to work out a satisfactory arrangement to avoid default in the three months during which they conducted their investigation into Charney," the complaint states.
After Charney was suspended, Federman claims, the board dropped the ball by failing to prevent him from buying up stock to increase his share in the company from 27 percent to 43 percent - "close to the critical 50 percent benchmark at which he can push for his reinstatement."
She claims the board waited 10 days to enact a stockholder agreement to prevent Charney from taking control of the company. But by then, she says, it was too late; Charney had already increased his stake.
Federman seeks damages for breach of fiduciary duty and aiding and abetting. She also seeks an injunction and wants board members to repay the salaries, fees and other benefits they got during the period in which they allegedly breached their fiduciary duties.
Named as defendants are Charney, directors Alberto Chehebar, David Danziger, Robert Greene, Marvin Igelman, William Mauer, and Allan Mayer. American Apparel is a nominal defendant.
Federman is represented by Leigh Parker with Weisslaw.
American Apparel spokeswoman Sallie Hofmeister declined to comment.