Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 Page 1 of 86 Page ID #:1184 1 BARROWAY TOPAZ KESSLER FILED 2 MELTZER & CHECK, LLP CLERK,^DISiRICT U.S COURT Ramzi Abadou (22256.7) 3 [email protected] APR 2 g 2011 Stacey M. Kaplan (241989) 4 skaplan@btkmc . com CEN " DISTRICT' F CALIFORN A Erik D. Peterson (257098) BY ' / _.__._ DEPUTY 5 [email protected] 6 580-California Street, Suite 1750 San Francisco, CA 94104 7 Telephone: (415) 400-3000 Facsimile: (415) 400-3001 8 Lead Counsel 9 10 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA 11 WESTERN DIVISION 12 13 IN RE AMERICAN APPAREL, INC. ) Case No. CV-10-6352 MMM (JCG) SHAREHOLDER LITIGATION ) (Consolidated) 14 ) CONSOLIDATED CLASS ACTION 15 ) COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 16 ) j JURY TRIAL DEMANDED 17 This Document Relates To: y( 18 ALL ACTIONS ) 19 ) 20 ) 21 ) 22 ) 23 24 25 26 27 28 Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 Page 2 of 86 Page ID #:1185 1 INTRODUCTION 2 1. Lead Plaintiff, Charles Rendelman ("Lead Plaintiff' or "Plaintiff"), 3 alleges the following based upon Lead Counsel's investigation, which included, 4 among other things: (i) interviews with former American Apparel, Inc. ("American 5 Apparel" or the "Company") employees; (ii) a review of Defendants' public 6 documents, conference calls and announcements, U.S. Securities and Exchange 7 Commission ("SEC") filings, wire and press releases published by and regarding 8 American Apparel; and (iii) securities analysts' reports and news advisories about the 9 Company. Lead Plaintiff believes that substantial additional evidentiary support will 10 exist for the allegations set forth herein after a reasonable opportunity for discovery. 11 2. This is a putative class action for violation of the federal securities laws 12 brought under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the 13 "Exchange Act"), and Rule lOb-5 promulgated thereunder by the SEC. Lead 14 Plaintiff's claims are brought on behalf of a class of all persons who purchased 15 American Apparel common stock between November 28, 2007 and August 17, 2010, 16 inclusive (the "Class Period"), to recover damages caused by Defendants' violations 17 of the securities laws. 18 3. Defendants are (i) American Apparel; (ii) the Company's Chief 19 Executive Officer ("CEO"), President and Chairman of the Board of Directors 20 ("Chairman"), Dov Charney ("Charney"); (iii) the Company's Director of Corporate 21 Finance and Development, Executive Vice President and Chief Financial Officer 22 ("CFO"), Adrian Kowalewski ("Kowalewski") (collectively, "Defendants"); 1 and (iv) 23 Lion Capital LLP, a private investment firm with a United States affiliate, Lion 24 Capital (Americas) Inc. (together "Lion Capital"). Lion Capital is named herein 25 26 ' As alleged below, Kowalewski held these titles at different times during the 27 Class Period. 28 -1- } Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 Page 3 of 86 Page ID #:1186 1 exclusively as a "control person" under §20(a) of the Exchange Act. American 2 Apparel is a self-described vertically-integrated manufacturer, distributor, and retailer 3 of branded fashion basic apparel. American Apparel also operates a leading 4 wholesale business that supplies T-shirts and other casual wear to distributors and 5 screen printers. All of American Apparel's manufacturing facilities for its global 6 operations and its headquarters are located near downtown Los Angeles. 7 SUMMARY OF THE ACTION 8 Defendants' Immigration Compliance Fraud 9 4. Immigration reform is a complex policy matter that, to this day, divides 10 the country and impacts people's lives in myriad ways. This federal securities class 11 action, however, is neither about immigration reform nor the somber challenges many 12 undocumented workers in America face. Rather, this case primarily involves 13 Defendants' efforts to mislead investors about American Apparel's compliance with 14 U.S. immigration law and the dire effects the Company's undisclosed, reckless 15 approach to compliance caused the Company's shareholders. 16 5. Throughout the Class Period, Defendants repeatedly and unequivocally 17 told the market that American Apparel (i) made "diligent efforts to comply with all 18 employment and labor regulations, including immigration laws;" (ii) that "American 19 Apparel's [garment factory] workers are documented immigrants and authorized to 20 work in the United States;" and (iii) that it was the "Company's policy, and has been 21 at all times, to fully comply with its obligations" under U.S. immigration laws. 2 As 22 alleged herein, these representations were utterly false. In early July 2009, the 23 Company was forced to disclose that Defendants had engaged in a decade-long 24 systemic pattern and practice of employing undocumented workers at its Los Angeles 25 factory. In fact, Defendants were ultimately fined by federal regulators after an 26 27 2 All emphasis is added. 28 -2- Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 Page 4 of 86 Page ID #:1187 1 Immigration and Custom's Enforcement ("ICE") I-9 audit found that Defendants had 2 unlawfully employed thousands of undocumented workers at its 800,000 square foot 3 Los Angeles garment factory. The Company's executive offices — including 4 Charney's and Kowalewski's — are located on the seventh floor of the same garment 5 factory. 6 6. American Apparel's labor practices have long been perceived as integral 7 to the Company's "brand," which the Company describes in its SEC filings as one of 8 its "core business strengths." According to the Company, it "has [] drawn attention to 9 the `Made in the USA' nature of its products and the `Sweatshop Free' environment in 10 which the Company's garments are produced." A Class Period analyst report issued 11 by KeyBanc Capital Markets perhaps best described American Apparel's "brand" as 12 follows: 13 APP'S domestic manufacturing helps differentiate its brand and gives it 14 competitive advantages. The Company is closely associated with its 15 decision to manufacture all of its garments in Los Angeles. First and 16 most importantly, American manufacturing has become an integral part 17 of its branding. The Company offers $9412 hourly wages, health care, 18 subsidized meals, and other additional benefits. We believe this gives 19 the Company a critical marketing advantage, particularly as 20 consciousness of workplace conditions and environmental issues 21 becomes increasingly important in consumer buying habits. 22 7. In turn, American Apparel's purportedly pro-immigrant "brand" identity 23 has long been closely tied to the Company's founder and CEO, Charney. 3 Like the 24 success of its once novel "brand," however, American Apparel's reckless Class Period 25 26 See, e.g., April 5, 2011 Proxy Statement ("Mr. Charney founded the Company 27 3[and] is considered intimately connected to American Apparel's brand identity.") 28 -3- Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 Page 5 of 86 Page ID #:1188 1 practices and disregard for the law are also intimately tied to Charney who, during the 2 Class Period, almost single-handedly ruined American Apparel through a mixture of 3 hubris, highly inappropriate conduct and the' egregious federal securities laws 4 violations giving rise, not only to this complaint, but also several ongoing parallel 5 criminal federal investigations into Defendants' Class Period wrongdoing .4 In fact, in 6 a New York Times article appearing after the Class Period, even Keith Miller, a current 7 member of the Company's own Board of Directors ("Board"), Audit Committee and 8 Chairman of the Compensation Committee, lamented the "erosion" Charney's 9 reckless behavior had caused the Company's shareholders. Indeed, by the last day of 10 the Class Period, the Company's share price traded at approximately $1.03 from an 11 artificially inflated Class Period high of approximately $15.60. 12 8. Charney has long been outspoken about immigration and labor reform 13 and, more specifically, amnesty for undocumented workers in Los Angeles where the 14 Company's factory and headquarters are based. Charney's rhetoric, however, is to 15 this day simply an elaborate advertising campaign for the Company's brand. For 16 instance, in a pre-Class Period article entitled "Employer is for Open U.S. Door," that 17 ran in the Los Angeles Times on April 20, 2006 (while American Apparel was still 18 private), Charney boasted, with respect to the Company's immigrant employment 19 practices, it "[d]oesn't matter what the [1-9] documents say, they're American 20 workers .... If you ask me to speculate, I think over 50% of the workers in my industry 21 22 23 4 On August 9, 2010, the Equal Employment Opportunity Commission 24 ("EEOC") expanded the scope of an existing sexual harassment investigation of 25 Charney to include other employees who, according to a Company filing with the SEC, "may have been sexually harassed." On August 9, 2010, the EEOC issued a 26 written determination to the Company that a "reasonable cause exists to believe the Company discriminated against Q women, as a class, on the basis of their female 27 gender, by subjecting them to sexual harassment." See also, n.14, infra. 28 -4- i Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 Page 6 of 86 Page ID i #:1189 1 are falsely documented ... I think we have to have wholesale amnesty, one shot. I 2 don't believe in any restrictions on exit or entry to the United States." 3 9.