(CN) – Former American Apparel CEO Dov Charney broke promises intended to bolster his holdings in company stock and continues to interfere with the firm that fired him last year, a hedge fund claims in a lawsuit.
Standard General LP, a New York-based investment firm specializing in troubled companies, sued Charney in the Delaware Chancery Court on July 13.
The lawsuit comes slightly more than two months after Charney sued the fund for $30 million, claiming his termination by the clothing retailer’s board was based on a bogus investigation and false claims.
In its complaint, Standard General says it became involved with Charney in early 2014, a time when American Apparel was “marred by mismanagement and mounting debt,” and owing a $13 million bond payment.
American Apparel’s board was also becoming restive about its CEO in the face of alleged misuse of company funds and other lapses.
Charney has always denied any wrong-doing.
After Charney was suspended as CEO on June 18, 2014, and resigned as board director the next day, he and Standard signed a letter of agreement to engage in a complex transaction in which Standard would buy at least 10 percent of American Apparel’s outstanding shares, then loan Charney the money to buy them, the complaint says.
As part of the deal, and in exchange for the loan, Charney agreed to “surrender the new shares, plus all of his original shares (which together amounted to roughly 43 percent of the then outstanding common stock), to Standard General as collateral for the loan,” Standard says
In addition, Charney allegedly “agreed not to vote his shares without Standard General’s consent,” and also that Standard could prevent him from voting for unfavorable proposals or directors, the lawsuit says.
Standard General says it insisted on these provisions because while it was “willing to entertain the possibility of Charney’s innocence,” it was not willing to take his assurances at face value.
Catching wind of the deal, Standard General says, American Apparel adopted a “poison pill” — a one-year stockholder rights plan — that capped beneficial ownership of any person or group at 15 percent, and claimed the plan applied retroactively, effectively blocking consummation of the transactions contemplated by the letter of agreement.
Ultimately, Standard General, American Apparel and Dov Charney allegedly entered into a standstill agreement in which the hedge fund agreed to help it pay a pending $10 million loan and provide it with an additional $15 million in operating capital.
As part of this deal, Charney allegedly agreed he would not serve as an officer or employee of the company unless and until he was cleared by committee looking into the allegations against him.
But the investigation did not go Charney’s way and he was fired on Dec. 15, 2014.
Since then, Standard General says, Charney has “not respected the board’s process or its decision to fire him.”
The former CEO, the complaint says, “has mounted an extensive and harmful campaign to reinsert himself into American Apparel’s management and operations and to discredit Standard General and its deal with him,” the complaint states. “He either has taken or threatens to take actions that his contracts specifically prohibit. He has defaulted on the loan and has interfered, or attempted to interfere, with Standard General’s relationships with the company and with its own investors. In an apparent effort to regain unilateral control over his stock and voting rights, he now claims that Standard General misled him into entering the loan by promising to return him to his position as CEO – a claim he never raised at the time or in the year since and something Standard General never agreed to do and never had the power to do or not do.”
Standard says Charney’s actions “threaten to derail a still-fragile business and to cause irreparable harm to Standard General and to the collateral it holds.”
The four-count, 42-page complaint alleges claims for breach of contract, bad faith, impairment of collateral, and seeks a declaratory judgment affirming the contracts’ validity.
Standard General is represented by Raymond DiCamillo with Richards Layton & Finger in Wilmington, Del.
Charney’s lawyer, Keith Fink, called the suit “a smoke screen to distract attention from our detailed, 110-page lawsuit against Standard General and a number of board members to disenfranchise and defraud Mr. Charney as a shareholder.”
Fink said Standard General has yet to answer Charney’s latest, fourth complaint against it, which he filed in Los Angeles County Superior Court June 24.
The fact that Standard brought suit after Charney filed his own, makes it “self-evident the purpose of the lawsuit was merely to give the hedge fund some PR cover,” Fink stated. “Meanwhile the workers continue to feverishly protest against current management.”
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