2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 1 of 99 Page ID #:2098 (' fl'J

1 KESSLER TOPAZ MELTZER & CHECK. LLP 2 Rarnzi Abadou (222567) r.IFpv 1t5 7R'rTrn1pr 3 [email protected] Eli R. Greenstein (21 7945) 4 egreensteinktmc.corn Stacey M. Kaplan (241989) CE.ALLi (TkL. ,1IJ 5 skap1anktmc.corn Erik D. Peterson (257098) 6 epetersonktmc.com 7 580 California Street, Suite 1750 San Francisco, CA 94104 8 Telephone: (415) 400-3000 Facsimile: (415) 400-3001 9 10 Lead Counsel for Lead Plaintiff Charles Rendelman 11 UNITED STATES DISTRICT COURT 12 CENTRAL DISTRICT OF CALIFORNIA 13 WESTERN DIVISION 14 15 IN RE AMERICAN APPAREL, INC Case No. CV-10-6352 MMM (CG) 16 SHAREHOLDER LITIGATION (Consolidated) 17 FIRST AMENDED CLASS ACTION 18 COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 19 This Document Relates To: ALL ACTIONS 20 JURY TRIAL DEMANDED 21 22 23 24 25 26 27 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 2 of 99 Page ID

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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 9 the Company. Lead Plaintiff believes that substantial additional evidentiary support 10 will exist for the allegations set forth herein after a reasonable opportunity for 11 discovery. 12 2. This is a putative class action for violation of the federal securities 13 laws brought under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the 14 “Exchange Act”), and Rule 10b-5 promulgated thereunder by the SEC. Lead 15 Plaintiff’s claims are brought on behalf of a putative class of all persons who 16 purchased or otherwise acquired American Apparel common stock between 17 November 28, 2007 and August 17, 2010, inclusive (the “Class Period”), to recover 18 damages caused by Defendants’ violations of the securities laws as alleged herein. 19 3. Defendants are: (i) American Apparel; (ii) the Company’s Chief 20 Executive Officer (“CEO”), President and Chairman of the Board of Directors 21 (“Chairman”), Dov Charney (“Charney”); (iii) the Company’s Director of 22 Corporate Finance and Development, Executive Vice President and Chief Financial 23 Officer (“CFO”), Adrian Kowalewski (“Kowalewski”) (collectively, 24 “Defendants”); 1 and (iv) Lion Capital LLP, a private investment firm with a United 25 States affiliate, Lion Capital (Americas) Inc. (together “Lion Capital”). Lion 26 Capital is named herein as a “control person” under §20(a) of the Exchange Act, 27 1 As alleged below, Kowalewski held these titles at different times during the 28 Class Period.

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1 and is liable for the period March 13, 2009, the day Lion Capital first entered into a 2 private financing agreement with the Company, until August 17, 2010. 3 4. American Apparel’s shares trade under the American Stock Exchange 4 symbol “APP.” The Company reports four operating segments – including U.S. 5 Wholesale, U.S. Retail, Canada and International. American Apparel’s primary 6 manufacturing facility is located in downtown Los Angeles where the “vertically- 7 integrated” Company employs thousands of people in the production of garments 8 and shirts. The Company’s downtown Los Angeles facility also houses the 9 Company’s executive offices, as well as cutting, sewing, warehousing and 10 distribution operations. According to the Company, its “vertically integrated 11 business model, with manufacturing and various other elements of our business 12 processes centered in downtown Los Angeles...enable[es] [American Apparel] to 13 quickly respond to market and customer demand for classic styles and new 14 products. For our wholesale operations, being able to fulfill large orders with quick 15 turn-around allows American Apparel to capture business. The ability to quickly 16 respond to the market means that our retail operations can deliver on-trend apparel 17 in a timely manner.” 18 5. In a June 26, 2007 analyst report initiating coverage on the Company, 19 Ladenburg Thalmann & Co. Inc. (“Ladenburg”) observed that American Apparel 20 “manufactures all its garments in the U.S., thus ‘American Apparel.’ Branding is 21 edgy and youthful and in some instances reflects the company’s pro-employee 22 strategy.” KeyBanc Capital Markets Inc. (“KeyBanc”) has described American 23 Apparel’s “brand” as follows: 24 APP’s domestic manufacturing helps differentiate its brand and gives 25 it competitive advantages . The Company is closely associated with its 26 decision to manufacture all of its garments in Los Angeles. First and 27 most importantly, American manufacturing has become an integral 28

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1 part of its branding. The Company offers $9-$12 hourly wages, health 2 care, subsidized meals, and other additional benefits. We believe this 3 gives the Company a critical marketing advantage, particularly as 4 consciousness of workplace conditions and environmental issues 5 becomes increasingly important in consumer buying habits. 2 6 6. The Company’s SEC filings also reflect that, throughout the Class 7 Period, the Company “rel[ied] heavily on immigrant labor” to manufacture its 8 garments domestically, and that it made “diligent efforts” to comply with all 9 immigration laws. 10 SUMMARY OF THE ACTION 11 Background to the Class Period 12 7. After starting a (since-bankrupt) T-shirt company in South Carolina in 13 1989, Charney founded American Apparel in 1998 as a California limited liability 14 private company. In September 2002, PR Week ran a profile piece on American 15 Apparel observing that “[e]verything about American Apparel, including its internal 16 and external PR practices, has been an organic extension of Charney’s beliefs, 17 visions, and personality.” The Company’s filings with the SEC confirm that Mr. 18 Charney “is considered intimately connected to American Apparel’s brand 19 identity.” In October 2003, American Apparel opened its first retail store in Los 20 Angeles. 21 8. American Apparel was incorporated on July 22, 2005 as Endeavor 22 Acquisition Corp. (“Endeavor”), a “blank check” company formed to acquire an 23 operating business. This was a signal to the market that Charney had decided to 24 take the Company public. On November 22, 2006, a letter of intent was executed 25 by Endeavor and American Apparel. The terms provided for the issuance of $190 26 million of Endeavor stock to Charney valued at the time at $7.75 a share. The 27 2 28 All emphasis is added.

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1 transaction terms were later amended to make them more favorable to Charney, 2 including increasing the number of shares he received and allowing him to remain 3 CEO. Charney also requested that the hiring of a Chief Operating Officer and Chief 4 Information Officer be waived as a condition to the closing. Endeavor capitulated. 5 9. Because of his desire to retain full control over the Company’s affairs, 6 market observers noted that Charney initially did not want to take the Company 7 public. In January 2006, The Guardian reported that “Charney seems to relish too 8 much the control and the flexibility guaranteed by the absence of shareholders to go 9 public.” By December 2006, however, Charney was nearly broke from financing 10 the 150-store Company since its inception. To gain access to much needed capital 11 (and enrich himself), on December 18, 2006, Endeavor entered into an Agreement 12 and Plan of Reorganization, amended November 7, 2007, with American Apparel 13 and its affiliated companies. Under the initial agreement, Charney was to step 14 down as CEO and take the title of American Apparel “creative director.” On 15 December 19, 2006, the New York Times reported that, “[t]he decision to sell the 16 privately held company, expected to be announced today, is a surprise move by the 17 company’s eccentric founder, Dov Charney, who is known for exercising strict, and 18 at times controversial, control over the retailer’s operations.” 19 10. As part of the merger, Charney also revised the terms of the buy-out of 20 Sang Ho Lim, his former 50% partner in the Company, to alleviate Charney’s 21 personal risks at the Company’s expense. As Ladenburg reported on November 9, 22 2007, “[p]reviously, Mr. Charney was to effect the buy-out himself and in the event 23 that he did not complete the purchase and Endeavor stepped in, then Mr. Charney’s 24 stake would have been reduced proportionately. Now, the number of shares Mr. 25 Charney receives will not be adjusted. The result of this change is that initially the 26 merged company will have less cash on its balance sheet....This change gives Mr. 27 Charney a majority stake without the burden of financing the Lim buy-out himself.” 28

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1 11. Ladenburg underwrote the Endeavor IPO, earning $1.825 million for 2 its work on the offering and, on November 15, 2007, Ladenburg reiterated its “buy” 3 rating and raised its priced target from $14.00 per share to $16.00 per share after 4 reviewing the Company’s updated Proxy Statement. In November 2007, Charney 5 used Endeavor’s time-crunch – Endeavor’s funds would be liquidated if the merger 6 was not completed by December 21, 2007 – to pressure it into providing him with 7 more favorable terms. Under the terms of the revised deal, Charney received an 8 additional five million shares, worth over $77 million, giving him control of 54.3% 9 of the Company. Moreover, although Charney had previously agreed to receive 10 only a $1 salary, he pressured Endeavor into granting him a $750,000 salary with 11 the potential for added bonuses. 12 12. Endeavor consummated the acquisition of American Apparel and its 13 affiliated companies on December 12, 2007, and, the same day, American Apparel 14 began trading on the American Stock Exchange. The acquisition was accounted for 15 as a reverse merger for accounting and financial reporting purposes, Endeavor was 16 treated as the acquired company, and American Apparel was treated as the 17 acquiring company. 3 Charney has served as Chairman, CEO, President and a 18 director of American Apparel since the consummation of the acquisition on 19 December 12, 2007, and upon going public, Charney’s reported net-worth from the 20 acquisition was valued at $580 million. 21 13. In tandem with its “vertically-integrated” operations, American 22 Apparel’s provocative positions on immigration reform have also long been seen as 23 integral to the Company’s “brand,” which the Company describes in its SEC filings 24 as one of its “core business strengths.” According to the Company, it “has [] drawn 25 attention to the ‘Made in the USA’ nature of its products and the ‘Sweatshop Free’ 26 environment in which the Company’s garments are produced.” In turn, American 27 3 On June 9, 2011, the SEC released a bulletin to investors warning that 28 reverse mergers are prone to “fraud and other abuses.” See Docket No. 87-2.

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1 Apparel’s pro-immigrant brand identity has long been closely tied to Charney, who 2 has long espoused immigration reform to promote the brand. Although Charney 3 may have once successfully exploited the Company’s domestic manufacturing and 4 immigration reform positions to cultivate American Apparel’s brand, once he and 5 Kowalewski voluntarily chose to tap the public capital markets by taking American 6 Apparel public, they assumed duties under the federal securities laws to speak 7 truthfully to American Apparel’s shareholders and the broader market about the 8 Company’s large undisclosed and illegal workforce. 9 14. By the start of the Class Period, however, Charney found himself 10 conflicted: either comply with his new federal securities reporting obligations and 11 (i) voluntarily self-report that thousands of American Apparel’s employees were 12 undocumented; (ii) risk damaging the brand by terminating those workers; (iii) face 13 possible federal sanctions; and (iv) disrupt his efforts to take the Company public 14 and to profit from the acquisition; or (v) mislead investors about American 15 Apparel’s immigration compliance hoping that then-presidential candidate Barack 16 Obama (who promised to provide a path to citizenship for America’s roughly 12 17 million undocumented immigrants while campaigning in 2007) would ameliorate 18 the dilemma for him. Charney chose to mislead investors. 19 U.S. Immigration Law Employment Requirements 20 15. The Immigration and Nationality Act (“INA”) sets forth the conditions 21 for the temporary and permanent employment of all persons seeking employment in 22 the U.S., and includes provisions that address employment eligibility and 23 employment verification. The INA applies to all U.S. employers. Under the INA, 24 employers may only hire persons who may legally work in the U.S. Employers 25 must verify the identity and employment eligibility of anyone being hired, including 26 completing an Employment Eligibility Verification Form (“I-9”). A Form I-9 27 requires employers to review and record a prospective employee’s identity 28

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1 document(s) and determine whether the document(s) reasonably appear to be 2 genuine and related to the individual. Forms I-9 are executed under penalty of 3 perjury by both the employer and the employee. Employers must keep each I-9 on 4 file for at least three years, or one year after employment ends, whichever is longer. 5 16. On its website, Immigration Customs Enforcement (“ICE”) advises all 6 employers that diligent hiring practices include: (i) using E-Verify, the U.S. 7 Department of Homeland Security (“DHS”) employment eligibility verification 8 program, to verify the employment eligibility of all new hires; (ii) using the Social 9 Security Number Verification Service (“SSNVS”) for wage reporting purposes. 10 Make a good faith effort to correct and verify the names and Social Security 11 numbers of the current workforce and work with employees to resolve any 12 discrepancies; (iii) establishing a written hiring and employment eligibility 13 verification policy; (iv) establishing an internal compliance and training program 14 related to the hiring and employment verification process, including completion of 15 Form I-9, how to detect fraudulent use of documents in the verification process, and 16 how to use E-Verify and SSNVS; (v) requiring the Form I-9 and E-Verify process 17 to be conducted only by individuals who have received appropriate training and 18 include a secondary review as part of each employee’s verification to minimize the 19 potential for a single individual to subvert the process; (vi) arranging for annual 20 Form I-9 audits by an external auditing firm or a trained employee not otherwise 21 involved in the Form I-9 process; (vii) establishing a procedure to report to ICE 22 credible information of suspected criminal misconduct in the employment eligibility 23 verification process; and (viii) establishing a tip line mechanism (inbox, e-mail, 24 etc.) for employees to report activity relating to the employment of unauthorized 25 workers, and a protocol for responding to credible employee tips. 26 17. A documentary appearing on the Company’s website entitled “Icing 27 American Apparel,” revealed that the Company did not use E-Verify for worksite 28

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1 enforcement. Defendants’ failure to use E-Verify was not an oversight. Defendants 2 did not use E-Verify to avoid making a record of their illegal hiring practices. 3 Confidential Witness (“CW”) 10, a former Executive Assistant to the Company’s 4 former Human Resources Director (Kristina Moreno (“Moreno”)), who worked at 5 the Company from August 2006 until the spring of 2008, confirmed that American 6 Apparel did not use E-Verify. On March 29, 2007, as Charney and Kowalewski 7 were preparing to take American Apparel public, DHS and ICE initiated an 8 investigation of American Apparel which, according to ICE, “appeared to be 9 unlawfully employing aliens who are unauthorized to work in the United States, in 10 violation of Title 8, United States Code, Section 1324a.” 11 Defendants’ False and Misleading Immigration Compliance Statements and Omissions 12 18. Throughout the Class Period, Defendants repeatedly told investors in 13 filings made with the SEC that American Apparel: (i) made “diligent efforts to 14 comply with all employment and labor regulations, including immigration laws;” 15 (ii) that “[m]any of American Apparel’s workers are documented immigrants and 16 authorized to work in the United States;” and (iii) that it was the “Company’s 17 policy, and has been at all times, to fully comply with its obligations” under U.S. 18 immigration laws. As alleged herein, these representations were all knowingly false 19 when made. 20 19. The Class Period begins on November 28, 2007, with the filing of the 21 Company’s Definitive Proxy Statement with the SEC on Form 14-A (“November 22 2007 Proxy”). The November 2007 Proxy gave shareholders notice that a Special 23 Meeting of Stockholders would be held on December 12, 2007, the first day 24 American Apparel’s shares traded on the American Stock Exchange, and 25 misrepresented to investors that “[m]any of American Apparel’s workers are 26 documented immigrants, authorized to work in the United States.” This statement 27 was false because, as alleged herein, Defendants had, for over a decade, knowingly 28

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1 employed thousands of undocumented workers at the Company’s Los Angeles 2 garment factory, many of whom Charney knew personally and described as 3 “family.” 4 20. On November 29, 2007, ICE special agents served a Notice of 5 Inspection on American Apparel (“Inspection Notice”) for all current 6 manufacturing employees at the Company’s downtown Los Angeles factory (where 7 Charney’s and Kowalewski’s executive offices were also located). The Inspection 8 Notice advised Defendants that ICE special agents were scheduled to inspect the 9 Company’s records on December 12, 2007 – the day American Apparel was slated 10 to go public. A former American Apparel employee, who worked in American 11 Apparel’s Human Resources Department from mid-2006 through January 2010 12 (“CW9”), stated that the Company actually learned of the ICE I-9 audit in August 13 or September 2007. CW10 corroborates that the Company had already gathered 14 Forms I-9 a couple of months before the Inspection Notice was served on the 15 Company in November 2007. 16 21. Kristina Moreno, the Company’s then Human Resources Director, who 17 reported directly to Charney, instructed a team to gather the Forms I-9 for 18 documentation in August/September 2007 to: (i) verify that every employee had a 19 Form I-9; (ii) review the Forms I-9 to make sure they were filled out correctly; and 20 (iii) ensure there were copies of the documentation. CW10 was instructed to fix 21 any Forms I-9 with missing information, including forging the I-9’s to make them 22 appear to have been signed within three days of the employees hire date – an 23 immigration law requirement made explicit on all Forms I-9. On December 10, 24 2007, Defendants sought and obtained an extension for the inspection. The 25 inspection was rescheduled for January 3, 2008. 26 22. The Inspection Notice expressly advised Defendants that ICE/DHS 27 special agents would be on site to review all Forms I-9 for the Company’s 28

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1 manufacturing employees.4 On January 3, 2008, ICE agents descended on the 2 Company’s headquarters and personally hand-counted the Forms I-9 in front of the 3 Company’s Chief Operating Officer (Martin Bailey (“Bailey”)), in-house counsel 4 (Joyce Crucillo (“Crucillo”)) and outside counsel. Bailey and Crucillo each 5 reported directly to Charney and Kowalewski. Despite being asked to certify ICE’s 6 count, suspiciously, management was unwilling to do so. To the contrary, Crucillo 7 actually made a handwritten notation on an ICE document that “[i]nitial hand count 8 was made by U.S. Immigration Customs Enforcement, not verified by company 9 representative .” 10 23. According to ICE, the Company represented that, as of January 2, 11 2008, there were 3,562 manufacturing employees at the Company. However, on 12 January 3, 2008, American Apparel presented only 3,554 Forms I-9 to the ICE 13 agents. Since the Company presented fewer Forms I-9 than workers, Defendants 14 knew, as of that time, that the Company was in existing violation of U.S. 15 immigration law because immigration laws mandate that every employee have a 16 Form I-9. Later, on August 25, 2009, ICE rechecked the two boxes of original 17 Forms I-9 and again determined that American Apparel had failed to prepare and 18 present original Forms I-9 for 85 employees and concluded that the Company 19 would be “charged with failure to prepare and present Forms I-9 for 85 employees.” 20 24. Despite the Inspection Notice’s obvious importance to investors given 21 the Company’s heavy reliance on immigrant labor, Defendants failed to disclose the 22 Inspection Notice until March 2008. Between November 29, 2007 and March 23 2008, however, Defendants made numerous other statements about the Company’s 24 immigrant workforce that obligated Defendants to disclose the Inspection Notice. 25 On December 5, 2007, for instance, the Company filed a post-effective amendment 26 to its Registration Statement which incorporated by reference the November 2007 27 4 A Form I-9 is used to establish the employment eligibility for all potential 28 employees in the United States. See Exhibit A.

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1 Proxy statement that “[m]any of American Apparel’s workers are documented 2 immigrants, authorized to work in the United States.” 3 25. Then, on December 11 and 18, 2007, the Company filed press releases 4 on Forms 8-K with the SEC that told investors to read the November 2007 Proxy, 5 but again failed to disclose that the Company had already received the Inspection 6 Notice, and that the Company was already in existing violation of U.S. immigration 7 laws. On January 18, 2008, Charney personally made extensive statements to the 8 New York Times regarding American Apparel’s “non-American-born” labor force 9 and support for immigration reform, stating that amnesty “is at the core of my 10 company, at the core of my soul.” Again, by making these statements without also 11 revealing the Inspection Notice, Charney’s January 18, 2008 statements were 12 rendered misleading when made. 13 26. On March 17, 2008, the Company’s 2007 Annual Report on Form 10- 14 K (“2007 Annual Report”) disclosed the Inspection Notice, stating that “[i]n late 15 2007, American Apparel received a notice from the Immigration and Customs 16 Enforcement division of the U.S. Department of Homeland Security [] requesting to 17 inspect the I-9 forms of the employees of American Apparel, Inc. In January 2008, 18 American Apparel provided ICE with access to the requested forms.” The 2007 19 Annual Report also stated that “ even if no violations are found ,” American Apparel 20 could experience employee turnover. 21 27. This too was misleading, as by March 17, 2008, Defendants knew that: 22 (i) violations had already been found; (ii) the Company had not given ICE access to 23 all the requested Forms I-9; and (iii) that the Company would experience massive 24 disruptions in connection with the I-9 audit. Indeed, when the audit started on 25 January 3, 2008, many of the Company’s undocumented workers, fearful of being 26 deported, stopped showing up for work and whole sections of the factory went dark. 27 Prior to the audit, by contrast, where Charney spent “50 hours per week,” the 28

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1 factory operated 24 hours a day for five or six days a week. Charney therefore saw 2 first-hand the disruptions caused merely by the I-9 audit itself. 3 Defendants Partially Disclose Their Illegal Workforce 4 28. On March 16, 2009, the Company’s 2008 Annual Report on Form 10- 5 K (“2008 Annual Report”), represented that “ American Apparel has not had any 6 further communications with ICE since this [January 3, 2008] request [for 7 Forms I-9] was fulfilled .” This statement was misleading because Defendants had 8 been in constant communication with ICE about the inspection, and were receiving 9 regular updates regarding ICE’s negative findings. In a July 3, 2009 New York 10 Times article, the Company’s outside counsel, Peter Schey (“Schey”) later admitted 11 that there had been “discussions over 18 months between federal officials and 12 American Apparel, after immigration agents first inspected the company’s files in 13 January 2008 .” ICE documents corroborate that, starting January 3, 2008, the 14 Company was routinely updated by ICE special agents regarding ICE’s negative 15 findings. In addition, because the Company was forging I-9 documents starting in 16 August/September 2007 in anticipation of the January 3, 2008 audit, Defendants 17 knew as early as fall 2007 that they were in noncompliance with U.S. immigration 18 laws because hundreds of the documents they had tried to verify were fake. 19 29. Then, on June 30, 2009, American Apparel revealed that one-third of 20 the Company’s Los Angeles-based manufacturing employees ( i.e., approximately 21 1,800 people) were found not to be authorized to work in the United States, and 22 were being terminated. The same press release, however, failed to also disclose 23 that over 700 or so other employees simply stopped coming to work as a result of 24 the ongoing I-9 audit. An article appearing in Fast Company dated August 24, 25 2010, which reported on a leaked statement Charney made during an internal 26 Company conference call, confirmed that, in fact, 2,500 of the Company’s 27 approximately 3,500 garment manufacturing employees had been lost due to the 28

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1 investigation. These revelations directly contradicted Defendants’ prior public 2 statements that the Company made “diligent efforts to comply with all employment 3 and labor regulations, including immigration laws ,” and that its manufacturing 4 employees were “documented immigrants and authorized to work in the United 5 States.”5 6 30. The same day, Defendants also misleadingly insisted that it “is the 7 Company’s policy, and has been at all times , to fully comply with its obligations to 8 establish the employment eligibility of prospective employees under immigration 9 laws .” Given that, as of January 3, 2008, Defendants were aware that the Company 10 was already in violation of U.S. immigration laws by failing to present sufficient 11 Forms I-9 to ICE, Defendants made this statement with actual knowledge of its 12 falsity. In response to this news, between June 30, 2009 and July 2, 2009, the 13 Company’s stock price tumbled approximately 16% on unusually heavy trading 14 volume. 15 31. Ultimately, in stark contrast to Defendants’ Class Period 16 representations, the I-9 audit concluded that immigration compliance “was not a 17 priority for the [] company” and that “American Apparel runs the risk of hiring 18 unauthorized aliens by not preparing Forms I-9 for all of their employees. This can 19 be shown by the large amount of unauthorized aliens employed at their 20 company .” ICE found massive irregularities in the Company’s hiring practices, 21 including the fact that 84.5% of the 2,297 employees with alien numbers at the 22 Company were undocumented. A former American Apparel Customer Service 23 Supervisor (“CW1”) who worked at the Company’s downtown facility during the 24 Class Period corroborated ICE’s findings, stating that the Company routinely hired 25 26 5 27 After the Company was fined by ICE for its immigration law violations, Charney awarded himself a performance bonus of $1,124,401 for his service for the 28 year ended December 31, 2009.

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1 undocumented workers. CW1 knew of at least three people in his/her department 2 who lacked proper documentation. 3 32. After the terminations, ICE determined that the Company had actually 4 rehired some of the terminated workers. On July 2, 2010, an ICE special agent 5 conducted another review of the Company to determine if there were any 6 employees who had been listed on the “Notice of Suspect Documents” who were 7 still working at the Company. The “Notice of Suspect Documents” which was 8 served on the Company in June 2009, found that: 9 [T]here were 41 employees listed on the Forms DE6 who had the same 10 or similar sounding names of 41 employees that had also been listed on 11 the Notice of Suspect Documents. 6 These 41 employees were also 12 listed on a spreadsheet that [the Company] had sent to ICE and it 13 indicated that they had been terminated, resigned, laid off, or 14 abandoned their jobs . Forty of these employees had presented new 15 Social Security numbers. One employee used the same Social 16 Security number. One employee the company left off the spreadsheet. 17 There were also six employees who the company had listed as updated 18 on the spreadsheet and it was found that they also did not have 19 employment authorization. 20 33. Former American Apparel employees corroborate that the Company 21 rehired some of the undocumented workers who had been previously terminated 22 (see ¶¶84-85, 87, 102, 139, infra). As alleged below, the Company rehired these 23 skilled workers in a desperate (yet failed) effort to try to stem the severe disruptions 24 caused by the mass terminations. 25 26 27 6 28 A DE6 is a California payroll tax form.

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Defendants Mislead Investors 1 About the Effects of the Terminations 2 34. In connection with the Company’s disclosures about the terminations, 3 Defendants misleadingly assured investors that “even if the Company were to lose 4 substantially all of the 1,800 identified employees (which represent approximately 5 one-third of the 5,600 employees the Company currently employs in its 6 manufacturing operations in the Los Angeles area), the Company does not presently 7 believe that the loss of employees would have a materially adverse impact on its 8 financial results.” In a press release on Form 8-K dated July 1, 2009, the Company 9 also misrepresented that “it has been the Company’s policy to fully comply with its 10 obligations to establish the employment eligibility of prospective employees under 11 immigration laws ” and that the “Company believes that its current surplus levels of 12 inventory and production capacity will mitigate the adverse impact of any 13 disruption to its manufacturing activities that may potentially result from the loss of 14 these employees. To the extent that the Company may need to hire replacement 15 workers, the Company presently believes it would only need to hire for a fraction 16 of those employees that would be terminated . The Company currently has a 17 significant backlog of active job applications.” Former American Apparel 18 employees dispute these accounts. See ¶¶81, 83, 138, infra. 19 35. In truth, Defendants knew that the loss of thousands of its most skilled 20 and efficient workers was having an immediate adverse impact on the Company’s 21 publicly-touted and once-nimble “vertically-integrated” operations. Before the 22 Company even began terminating its workers in 3Q09, the Company preemptively 23 hired new manufacturing employees to try to stem the anticipated disruptions. As 24 early as June 2009, Defendants doubled-up on workers by having two individuals 25 perform the same tasks, something that was not only inefficient, but caused the 26 Company’s operating costs to rise. 27 28

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1 36. After a meeting with Charney on July 1, 2009, KeyBanc analyst 2 Edward Yruma noted in a research report on American Apparel that 3 “[mJanagement was clear in emphasizing that even if a significant number of the 4 1,800 employees are deemed ineligible to work, the Company should not see a 5 material financial impact. ‘Made in Los Angeles’ is key to the brand, management 6 should be able to replace workers .” At the same time Defendants were 7 misleadingly allaying investors’ concerns, Defendants knew that the workers had 8 already been deemed ineligible to work, and that the Company was having grave 9 difficulties replacing those workers. See ¶¶81, 83, 126-27, 138, infra. 10 37. A former Manufacturing Division Controller, who worked at American 11 Apparel from 2008 until mid-June 2010 (“CW2”), confirms that the impact of the 12 dismissals in 3Q09 was evident at the Company no later than 4Q09, and that 13 Charney was personally aware of the significant negative impact caused by the 14 workforce reduction. A former Distribution/Returns Supervisor at the Company 15 from August 2009 to early 2010 (“CW3”), stated that it was ridiculous for Charney 16 to suggest that he did not know about the loss of productivity which began 17 negatively impacting the Company’s operations immediately following the loss of 18 workers who were either terminated, or altogether stopped showing up. In addition 19 to requiring substantial training, the replacement workers were generally slower 20 than the far more skilled and efficient terminated workers who had been at the 21 Company for up to a decade. 22 38. Contrary to what Defendants told investors on June 30 and July 1, 23 2009, therefore, it was not the Company’s “policy” to “fully comply with its 24 obligations to establish eligibility of prospective employees under immigration 25 laws” because, at the same time they were making these statements, Defendants 26 were rehiring the same undocumented employees they knew were undocumented. 27 28

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1 As alleged herein, Defendants failed to fully disclose these facts to investors until 2 almost a year later in May 2010. 3 39. On a November 10, 2009 earnings conference call with analysts for 4 3Q09, then-CFO Kowalewski misleadingly responded to an analyst question about 5 the implications of terminations, saying “I think what we said back in July [2009] 6 when we had this issue was we didn’t think it [(the ICE enforcement action)] was 7 going to have a material impact to our financial results.” During the same call, 8 Kowalewski also falsely characterized the loss of the Company’s manufacturing 9 employees as a competitive advantage that would result in lower costs , explaining 10 that “because we had been operating with a higher number of workers than maybe 11 we would have needed under normal circumstances. So we do think some of the 12 head count has improved our overhead situation .” During the same call, Charney 13 stated that he “agree[d] with what Adrian [Kowalewski] said.” These statements 14 were highly misleading because, at the time they were made, Defendants had actual 15 knowledge that the terminations were having grave effects on the Company’s 16 financial and operating performance, and that costs had increased dramatically due 17 to the inefficiencies associated with doubling up on workers. 18 40. A former Resource Assignor in American Apparel’s Production and 19 Planning Department from November 2007 until the beginning of 2010 (“CW5”), 20 confirmed that the workforce reduction negatively affected production in 3Q09 21 because the replacement employees were inexperienced, and could not perform 22 their jobs as efficiently as the more experienced terminated workers. CW5 23 estimates that the new employees were only producing half as much as the 24 employees who were terminated. This assertion was based, in part, on the 25 Company’s delay in bringing certain clothing styles to market – i.e. , American 26 Apparel was still putting out swimwear and summer attire in the fall of 2009. 27 28

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#:2116

1 41. Ultimately, as alleged herein, the impact of the dismissals was evident 2 at the Company at the same time Defendants were telling investors that the loss of 3 the Company’s manufacturing employees was a competitive advantage that would 4 result in lower costs (see ¶39, supra). At the direct ion of the Company’s 5 management, there was a mad rush to hire replacement employees in 3Q09 and 6 4Q09, which resulted in almost double the number of employees in the same 7 manufacturing positions. While payroll was increasing during June through 8 September 2009, productivity was slowing down, and sales were not keeping up 9 with the Company’s bloated expenses. Charney knew in real time about the 10 significant negative impact caused by the dismissal of manufacturing workers 11 because Charney was heavily involved in every aspect of American Apparel’s 12 operations. Other former American Apparel employees confirm these accounts ( see 13 ¶¶80-84, 86-87, 89-91, 101-02, 134-38, infra). 14 Defendants Partially (and Belatedly) Disclose the Terminations’ Negative Effects 15 42. On March 31, 2010, the Company filed its 2009 Annual Report on 16 Form 10-K (“2009 Annual Report”), which conceded that American Apparel’s 17 “cost of sales was [] negatively impacted by lower capacity utilization of our 18 manufacturing facilities in the first half of 2009 , and the substantial reduction in 19 manufacturing efficiency experienced in the fourth quarter of 2009 at our 20 production facilities.” Then, on May 19, 2010, the Company revealed that the 21 Company’s gross margins had been negatively impacted by reduced labor 22 efficiency at the Company’s Los Angeles production facilities due to the fact that 23 1,500 experienced manufacturing employees had been dismissed in 3Q09 and 24 4Q09. 25 43. The Company also disclosed that the impact of the lower 26 manufacturing efficiency could impact its financial results into 2011, and that the 27 “reduction in labor efficiency was a result of the dismissal of over 1,500 28

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#:2117

1 experienced manufacturing employees in the third and fourth quarters of 2009 2 following the completion of an I-9 inspection by U.S. Immigration and Customs 3 Enforcement.” On a same-day May 19, 2010 conference call following the 4 Company’s press release, Charney conceded the absence of factory employee 5 “stability” that both he and Kowalewski had touted only months earlier (see ¶39, 6 supra): 7 We didn’t move quickly enough after we had the immigration 8 intervention. We were still in the mode it was a culture ....We should 9 have been hiring more people....We are off our game but we are going 10 to get back on our game as far as – in a way the fact that we had this 11 Made in USA factory we were not getting the full benefit of it because 12 actually we don’t have enough people . 13 44. Upon the release of this news, which starkly contradicted Defendants’ 14 prior statements that the terminations had “ improved [] overhead ” and that there 15 was “stability in the workforce,” shares of the Company’s stock plunged 40.51% , to 16 close on May 19, 2010 at $1.63 per share, on unusually heavy trading volume. 17 45. Finally, on August 17, 2010, the Company announced in a press 18 release on Form 8-K that it would report a loss from operations of $5 million to $7 19 million for the quarter. Again, the primary reason cited for the loss was “lower 20 labor efficiency at the Company’s production facilities,” which was the direct result 21 of both the mass workforce terminations, and the replacement hiring of over 1,600 22 net new manufacturing workers during the second quarter of 2010. The same day, 23 Defendants, for the first time, also disclosed that the Company might not have 24 sufficient liquidity necessary to sustain operations for the next twelve months, and 25 that there existed “substantial doubt that the Company will be able to continue as a 26 going concern.” On this news, shares of the Company’s stock tumbled an 27 additional 25.9%, to close on August 17, 2010 at $1.03 per share, on heavy trading 28

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#:2118

1 volume. As the market continued to digest this news, the Company’s stock fell an 2 additional 27.2%, to close on August 19, 2010 at approximately $0.75 per share, on 3 unusually heavy trading volume. 4 46. After the full impact of the immigration violations came to light, nearly 5 forcing the Company into bankruptcy, the Company granted 6.5 million shares of 6 stock (almost 9% of the Company) to “executive and non-executive management 7 employees and certain consultants” which significantly diluted already depressed 8 shareholder value. 7 9 Defendants Mislead Investors About Their Reckless Business Practices 10 47. Only a few months after taking the Company public, Charney’s highly 11 reckless approach to running his new publicly-traded company began to manifest. 12 In a March 20, 2008, interview with the Wall Street Journal, Charney humiliated 13 his then-current CFO, Ken Cieply (“Cieply”), saying Mr. Cieply had “no 14 credibility” and was a “complete loser.” The very next day, Charney reversed 15 course, calling his words “juvenile” and apologized in a letter to the Wall Street 16 Journal, writing that Mr. Cieply had “enormous credibility.” To market observers, 17 Charney’s public attack on the Company’s own CFO was astonishing because the 18 Company had just gone public, and Mr. Cieply’s 2007 base salary had just been 19 increased 20%. Mr. Cieply resigned a short time after Charney’s comments. 20 48. In a press release on Form 8-K filed with the SEC on December 31, 21 2008, the Company announced that it had replaced Mr. Cieply with Kowalewski. 22 Kowalewski succeeded William T. Gochnauer, who had served as the Company’s 23 Interim CFO (replacing Mr. Cieply) since May 22, 2008. Kowalewski initially 24 joined the Company in 2006 as an intern and had previously been the Company’s 25 26 7 Under the terms of the acquisition, Charney was prohibited from selling any Company shares from December 12, 2007 until December 12, 2010. On March 13, 27 2009, as part of the financing agreement with Lion Capital, the three year lock up agreement was, subject to certain conditions, extended until December 31, 2013. 28

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1 Director of Corporate Financing and Development. Kowalewski was promoted to 2 CFO of American Apparel at the age of 31 – a mere two years after he earned his 3 Masters of Business Administration degree in 2006.8 Charney’s promotion of the 4 sorely untested and inexperienced Kowalewski to replace Mr. Cieply was 5 deliberate. 6 49. With a grossly inexperienced CFO and Charney lackey now 7 responsible for American Apparel’s public financial statements, Charney enabled 8 himself to continue to manage the Company’s finances and other operations with 9 little oversight or accountability. On a May 13, 2008 earnings conference call for 10 1Q08 after the Wall Street Journal “loser” article appeared, Charney falsely 11 reassured investors that the Company was “looking to build a world class financial 12 team. We want to – we have a very creative company and a creative brand, but we 13 want to pursue a strict corporate orthodoxy as far as financial accounting issues 14 and putting together a team . And we’re studying that and working on that very 15 closely.” This statement was misleading because Charney knew that American 16 Apparel’s financial accounting practices were anything but “strict,” and that the 17 Company’s internal controls were virtually non-existent. This would only worsen 18 with Kowalewski – far from a “world class” financial executive – as CFO. 19 50. As part of the Company’s efforts to rehabilitate its image, American 20 Apparel hired Deloitte & Touche LLP (“Deloitte”) as its registered independent 21 public auditor in April 2009. After the Deloitte hire, a KeyBanc report dated April 22 22, 2009, highlighted that the Company was “ [cJommitted to best practices . The 23 question was asked about what management views as a Street misperception about 24 the Company, to which management highlighted the flawed view that the Company 25 is disorganized and unsystematic internally. Charney emphasized the Company’s 26 27 8 28 See Exhibit B.

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#:2120

1 commitment to conservatism and maintaining best practices .” In response to this 2 news, the Company’s stock price jumped 7.66%. 3 51. Then, on July 28, 2010, the Company was forced to announce that, 4 effective July 22, 2010, after only 16 months with the Company, Deloitte had 5 resigned as the Company’s independent auditor because it was “ no longer willing 6 to rely on management’s representations due to Deloitte’s belief that management 7 withheld from Deloitte the February 2010 monthly financial statements until after 8 the filing of the 2009 10-K and made related misrepresentations.” Far from 9 pursuing a “strict corporate orthodoxy,” in other words, Defendants were 10 withholding negative financial information not only from investors but the 11 Company’s own auditor. The negative financial information Defendants withheld 12 from Deloitte concerned the significant disruptions that the forced workforce 13 reductions had on the Company in 2009. Deloitte resigned because it had been 14 lured into expressing an “unqualified opinion” for the Company’s 2009 Annual 15 Report when, in truth, the Company was facing bankruptcy. 16 52. Due to the significant negative impact the terminations had on the 17 Company’s financial performance, liquidity and overall business condition, in 2009 18 and into early 2010, American Apparel was in desperate need of additional 19 financing and covenant waivers. Defendants knew that such financing and waivers 20 would be far more difficult (and prohibitively expensive) to obtain if the Company: 21 (i) issued a “going concern” qualification in its 2009 Annual Report; and (ii) 22 disclosed the serious deterioration in its financial condition as a result of the 23 terminations in 2009. Had Deloitte timely been given access to the Company’s 24 negative financial statements, Deloitte would have insisted on an adverse “going 25 concern” disclosure in the Company’s 2009 Annual Report. Defendants 26 deliberately withheld this crucial adverse financial information and negative trends 27 from Deloitte, thus enabling themselves to issue financial statements and other 28

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1 positive qualitative statements without alerting investors to the severity of the risk 2 that American Apparel could go bankrupt due to the terminations. 3 53. On July 28, 2010, Defendants also revealed that Deloitte had resigned 4 because “certain information had come to Deloitte’s attention that if further 5 investigated may materially impact the reliability of either its previously issued 6 audit report or the underlying consolidated financial statements for the year ended 7 December 31, 2009 included in the Company’s 2009 Form 10-K.” Deloitte later 8 withdrew its audit for all of the Company’s 2009 financial statements, warning 9 investors that they should “no longer be relied upon.” On this news, the Company’s 10 stock price fell 14.36% on unusually heavy volume. In an interview with the Los 11 Angeles Times on July 29, 2010, Charney spun the Deloitte resignation, stating it 12 was “a good step for the company.” 13 54. On August 17, 2010, American Apparel revealed additional facts about 14 the Deloitte resignation, admitting “[i]t is the Company’s understanding that 15 ‘certain information’ [as used by Deloitte] refers to the Company’s financial results 16 for the first quarter of 2010, trends in the Company’s business occurring after the 17 first quarter of 2010 and the Company’s projected financial results for the 18 remainder of 2010 as of April 30, 2010.” In addition, while the Company has 19 disputed Deloitte’s account, Deloitte stood by its position that Defendants 20 committed an accounting fraud, explaining “we believe that we requested the 21 February 2010 financial information prior to issuing our reports and that 22 management informed us that such information was not available .” In truth, 23 management had the information; they just did not want it shared publicly. 24 55. The same day, Defendants disclosed that they had received a Grand 25 Jury subpoena dated July 30, 2010 ( i.e., a week after Deloitte quit) from the 26 Department of Justice (“DOJ”) for the production of documents relating to the 27 circumstances surrounding the Deloitte resignation and a related inquiry from the 28

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1 SEC regarding the matter. Then, in November 2010, it was also revealed that 2 American Apparel had also received a subpoena from the U.S. Attorney’s Office 3 for the Central District of California for documents relating to an official criminal 4 investigation being conducted by the Federal Bureau of Investigation (“FBI”) into 5 Deloitte’s resignation and the Company’s financial reporting and internal controls. 6 The DOJ criminal investigation is ongoing. On August 19, 2010, retail trade 7 publication Women’s Wear Daily (“ WWD ”) quoted an experienced corporate 8 lawyer who aptly observed “‘[a]nytime auditors step back, you’ve really got to take 9 a hard look at whether there was fraud.’” 10 56. In response to this and other same-day negative announcements, the 11 Company stock price fell over 46% between August 16 and August 19, 2010 as the 12 market digested the full impact of these adverse disclosures. 13 Post-Class Period Events 14 57. On December 7, 2010, the SEC sent Kowalewski a letter requesting, 15 among other things, additional information about the representation in the 16 Company’s 2009 Annual Report that “cost of sales was negatively impacted by 17 lower capacity utilization in the first half of 2009 and a substantial reduction in 18 manufacturing efficiency in the fourth quarter of 2009 at your production facilities.” 19 In a letter to the SEC dated February 15, 2011, Kowalewski responded that: 20 During the fourth quarter of 2009, the production of the sewing 21 operators employed by the Company decreased as a result of the 22 turnover in staff from the dismissal in connection with the I-9 23 inspection by U.S. Immigration and Customs Enforcement during the 24 third quarter of 2009, as well as the hiring of over 500 new 25 manufacturing employees during the fourth quarter of 2009. Newer or 26 less-experienced sewing operators typically produce at a lower rate 27 than more experienced operators. At the current time, the Company’s 28

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1 systems do not allow for reliable detailed enumerations of the 2 individual components of the change . 3 58. Earlier, however, in March 2009, Defendants boasted about the 4 Company’s systems saying “we get daily inventories at this point. The whole 5 creative team has access to inventory turns by color, by fabric style. The amount of 6 information we are getting is incredible. And not only is it – we have a department 7 of people now that are involved in designing, creating reports, and I believe we can 8 continue to improve inventory trends, but also – by knowing what we have and 9 knowing what is selling and what’s trending.” This visibility also allowed 10 Defendants, according to Kowalewski to “better...track the cost of inventory.” 11 59. On March 31, 2011 American Apparel filed its long-delayed 2010 12 Annual Report on Form 10-K with the SEC (“2010 Annual Report”). The 2010 13 Annual Report admitted a litany of irregularities at American Apparel during the 14 Class Period. 9 First, the 2010 Annual Report included its new auditor’s “ adverse 15 opinion on the effectiveness of the Company’s internal control over financial 16 reporting [during the Class Period] because of the existence of material weaknesses 17 [at the Company].” 10 The adverse opinion concluded that, during the Class Period: 18 (i) “the company did not maintain an adequate control environment that fully 19 emphasized the establishment of, adherence to, or adequate communication 20 regarding appropriate internal control over financial reporting;” and (ii) “the 21 Company did not perform adequate independent reviews and maintain effective 22 controls over the preparation of financial statements.” In addition, the 2010 Annual 23 Report belatedly confirmed that “[i]f American Apparel is unable to successfully 24 25 26 9 Kowalewski was replaced as CFO on February 7, 2011. 10 27 Its new auditor, Marcum LLP (“Marcum”), was previously fired as the Company’s independent auditor in April 2009 after disclosing “material 28 weaknesses” in American Apparel’s internal control over financial reporting.

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1 implement steps to improve its liquidity position, it may need to voluntarily seek 2 protection under Chapter 11 of the U.S. Bankruptcy Code.” 3 60. In a press release dated April 1, 2011, the Company also revealed that 4 Lion Capital, a private investment fund that loaned the Company $80 million in 5 March 2009, had suddenly removed its two designated directors (who were 6 simultaneously Lion Capital partners) – Lyndon Lea (“Lea”) and Neil Richardson 7 (“Richardson”) – from American Apparel’s Board of Directors (the “Board”). For 8 investors, Lion Capital’s belated attempt to distance itself from Defendants was too 9 little, too late. After the removal of Lion Capital’s directors from the Board, 10 Defendants admitted that Lea and Richardson were removed to eliminate “conflicts 11 of interest” created by Lion Capital’s role as a lender and creditor to the Company 12 during the Class Period. 13 61. Finally, in addition to former CFO Ken Cieply, who resigned from the 14 Company in 2008, and Deloitte’s noisy withdrawal in July 2010, American Apparel 15 has suffered a slew of additional high-level resignations since the end of the Class 16 Period, including: 17 • Keith Miller, a member of the Company’s Board, Audit Committee 18 and Chairman of the Compensation Committee during the Class Period 19 resigned on May 2, 2011, publicly lamenting the “erosion ” Charney’s 20 conduct had caused the Company’s shareholders. 21 • Audit Committee members Mark Samson and Mark Thorton resigned 22 on July 1, 2011. 23 • Tom Casey, Acting President of American Apparel who was hired in 24 October 2010 “to validate the Company’s strategy, improve operating 25 disciplines and optimize the capital structure,” resigned a short time 26 later on November 18, 2011, two months shy of his employment 27 contract with the Company. 28

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1 • Marty Staff (Chief Business Development Officer), who was 2 personally hired by Charney, resigned in October 2011, stating that 3 “Dov [Charney] is a one-man band, and I don’t think I realized how 4 singular that vision is. When I joined, I don’t think I realized how 5 actively Dov manages every part of the company – from design to IT 6 to marketing to finance. All roads lead through Dov . No judgment on 7 that, but I think I was used to something more collaborative.” 8 62. Mr. Staff’s perspectives on Charney’s singular control over the 9 Company’s operations were most recently described on December 22, 2011, when 10 the Company itself was required to issue an unprecedented press release on Form 8- 11 K explaining that “[l]ast week, an article appeared in a trade publication that 12 referred to estimates of American Apparel, Inc.’s [] fiscal 2011 EBITDA that were 13 attributed to our Chief Executive Officer . Consistent with the Company’s policy 14 to not make projections of EBITDA or other financial performance measures, the 15 Company hereby disclaims such estimates and cautions that no reliance should 16 be placed on them .” In other words, American Apparel is now itself finally 17 warning the Company’s shareholders not to rely on Charney’s public statements. 18 Charney may be one of “fashion’s leading innovators,” but, as alleged herein, he is 19 simply incapable of serving as the CEO of a publicly-traded Company. 20 JURISDICTION AND VENUE 21 63. The claims asserted herein arise under and pursuant to §§10(b) and 22 20(a) of the Exchange Act, (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 23 promulgated thereunder (17 C.F.R. §240.10b-5). 24 64. This Court has jurisdiction over the subject matter of this action 25 pursuant to §27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. §1331. 26 65. Venue is proper in this District pursuant to §27 of the Exchange Act, 27 15 U.S.C. §78aa and 28 U.S.C. §1391(b). Many of the acts and transactions alleged 28

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1 herein, including the preparation and dissemination of materially false and 2 misleading information, occurred in substantial part in this District. Additionally, 3 American Apparel’s principal executive offices are located within this District. 4 66. In connection with the acts, conduct and other wrongs alleged in this 5 Complaint, Defendants, directly or indirectly, used the means and instrumentalities 6 of interstate commerce. THE PARTIES 7 8 67. Lead Plaintiff, Charles Rendelman, as detailed in the Certification of 9 Named Plaintiff attached to his motion for appointment of lead plaintiff filed on 10 October 25, 2010, and incorporated by reference herein, purchased American 11 Apparel securities at artificially inflated prices during the Class Period and has been 12 damaged thereby. 13 68. Defendant American Apparel is a Delaware corporation with its 14 principal executive offices located at 747 Warehouse Street, Los Angeles, 15 California 90021. 16 69. Defendant Charney was, at all relevant times, the Company’s 17 President, CEO, and Chairman of the Board. Charney also served as the President, 18 CEO, director and founder of American Apparel’s predecessor, Old American 19 Apparel, as well as its predecessor companies dating back to 1989. As CEO, 20 Charney was responsible for and/or signed Company filings with the SEC, 21 including the November 2007 Proxy; May 16, 2008 Form 10-Q (“1Q08 10-Q”); the 22 August 15, 2008 Form 10-Q (“2Q08 10-Q”); the November 10, 2008 Form 10-Q 23 (“3Q08 10-Q”); the 2008 Annual Report; the April 29, 2009 Proxy Statement; the 24 June 30, 2009 Form 8-K; the August 13, 2009 Form 10-Q (“1Q09 10-Q”); the 25 August 17, 2009 Form 10-Q (“2Q09 10-Q”); the September 11, 2009 Proxy 26 Statement; the November 10, 2009 Form 10-Q (“3Q09 10-Q”); the 2009 Annual 27 Report; the October 15, 2010 Proxy Statement and the 2010 Annual Report.

28

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70. In addition, for every reporting quarter during the Class Period, 2 Charney personally signed a Certification pursuant to §302 of the Sarbanes-Oxley 3 Act of 2002 that certified as follows: 4 I, Dov Charney, certify that: 5 I have reviewed this quarterly report on Form 10-Q of America Apparel, Inc. 6

2. Based on my knowledge, this report does not contain any untrue

7 statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under

8 which such statements were made, not misleading with respect to the period covered by this report; 9

3. Based on my knowledge, the financial statements, and other financial 10 information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows 11 of the registrant as of, and for, the periods presented in this report;

12 4. The registrant’s other certifying officer and I are responsible for

establishing and maintaining disclosure controls and procedures (as 13 defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal

control over financial reporting (as defined in Exchange Act Rules 14 13a-15(f) and 15d-15(f)) for the registrant and have:

15 a) Designed such disclosure controls and procedures, or caused such

disclosure controls and procedures to be designed under our

16 supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known

17 to us by others within those entities, particularly during the period in which this report is being prepared; 18

b) Designed such internal control over financial reporting, or caused

19 such internal control over financial reporting to be designed under

our supervision, to provide reasonable assurance regarding the

20 reliability of financial reporting and the preparation of financial

statements for external purposes in accordance with generally 21 accepted accounting principles; 22 c) Evaluated the effectiveness of the registrant’s disclosure controls

and procedures and presented in this report our conclusions about

23 the effectiveness of the disclosure controls and procedures, as of

the end of the period covered by this report based on such 24 evaluation; and

25 d) Disclosed in this report any change in the registrant’s internal

control over financial reporting that occurred during the

26 registrant’s most recent fiscal quarter (the registrant’s fourth

fiscal quarter in the case of an annual report) that has materially

27 affected, or is reasonably likely to materially affect, the 28

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registrant’s internal control over financial reporting; and 1

5. The registrant’s other certifying officer and I have disclosed, based

2 on our most recent evaluation of internal control over financial

reporting, to the registrant’s auditors and the audit committee of the 3 registrant’s board of directors (or persons performing the equivalent functions): 4

a) All significant deficiencies and material weaknesses in the design 5 or operation of internal control over financial reporting which are

reasonably likely to adversely affect the registrant’s ability to 6 record, process, summarize and report financial information; and

7 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s 8 internal control over financial reporting. 9 71. Defendant Kowalewski was, at relevant times, the Company’s 10 Executive Vice President and CFO, as well as a Director. Kowalewski served as 11 the Company’s Director of Corporate Finance and Development from 2006 through 12 December 2008. As CFO, Kowalewski was responsible for and/or signed Company 13 filings with the SEC, including the 2008 Annual Report, the 1Q09 10-Q, the 2Q09 14 10-Q, the 3Q09 10-Q, the 2009 Annual Report, the May 11, 2010 Form NT 10-Q, 15 the May 19, 2010 Form 8-K and the July 28, 2010 Form 8-K. In addition, for every 16 reporting quarter after Kowalewski was promoted to CFO, Kowalewski signed 17 Certifications pursuant to §302 of the Sarbanes-Oxley Act of 2002 that, in 18 substantial form, were identical to that of the Sarbanes-Oxley Certification alleged 19 in ¶70, supra. 20 72. Defendants Charney and Kowalewski are collectively referred to 21 hereinafter as the “Individual Defendants.” The Individual Defendants, because of 22 their positions with the Company, possessed the power and authority to control the 23 contents of American Apparel’s reports to the SEC, press releases and presentations 24 to securities analysts, money and portfolio managers and institutional investors, i.e., 25 the market. Each Individual Defendant was provided with copies of the Company’s 26 reports and press releases alleged herein to be misleading prior to, or shortly after, 27 28

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1 their issuance and had the ability and opportunity to prevent their issuance or cause 2 them to be corrected. 3 73. By reason of their positions as officers and directors of American 4 Apparel and because of their ability to control the business and corporate affairs of 5 the Company, the Individual Defendants owed American Apparel shareholders an 6 absolute obligation of candor. As officers of a publicly-held company, the 7 Individual Defendants had a duty to promptly disseminate accurate and truthful 8 information with respect to the Company’s operations, finances and compensation 9 practices. The Individual Defendants substantially participated in the issuance 10 and/or review of the false and/or misleading statements alleged herein, including 11 the false SEC filings and reports issued to American Apparel shareholders. The 12 Individual Defendants possessed the power and authority to control the contents of 13 American Apparel’s Proxy Statements, quarterly reports, press releases, SEC filings 14 and presentations to securities analysts, money and portfolio managers, news 15 reporters and investors, i.e., the market. 16 74. The Individual Defendants were aware of their obligations to comply 17 with applicable laws and to disclose the truth about American Apparel because such 18 requirements are detailed in American Apparel’s own Code of Ethics (“Code”). 19 The Code establishes that the “Board of Directors of American Apparel, Inc. has 20 adopted this code of ethics (the ‘Code’), which is applicable to all directors, officers 21 and employees.” The Code also requires all employees to “[o]bserve all applicable 22 governmental laws, rules and regulations [and] [c]omply with the requirements of 23 applicable accounting and auditing standards, as well as Company policies, in order 24 to maintain a high standard of accuracy and completeness in the Company’s 25 financial records and other business-related information and data.” 26 75. The Individual Defendants knowingly violated these internal policies 27 because, under the Code, “the Chief Executive Officer and Chief Financial 28

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1 Officer of the Parent and each subsidiary of Parent (or persons performing similar 2 functions), and each other person that typically is involved in the financial reporting 3 of the Company must familiarize himself or herself with the disclosure 4 requirements applicable to the Company as well as the business and financial 5 operations of the Company.” Defendants also violated their duty to “not knowingly 6 misrepresent, or cause others to misrepresent, facts about the Company to others, 7 whether within or outside the Company, including to the Company’s independent 8 auditors , governmental regulators, self-regulating organizations and other 9 governmental officials” when they, among other things, “withheld from Deloitte the 10 February 2010 monthly financial statements until after the filing of the 2009 10-K 11 and made related misrepresentations” to Deloitte. 12 76. Defendants violated these Company, Generally Accepted Accounting 13 Principles (“GAAP”) and SEC mandates by making false and misleading 14 statements and omissions in American Apparel’s financial statements regarding the 15 Company’s compliance with immigration laws, the effect of its immigration law 16 violations and its financial condition. Defendants knew, or were deliberately 17 reckless in not knowing, that facts indicating that all of the Company’s interim 18 financial statements, press releases, public statements, and financial filings with the 19 SEC, which were disseminated to the investing public during the Class Period, were 20 materially false and misleading. The Individual Defendants are liable for the false 21 statements pleaded herein, as those statements were each “group-published” 22 information, the result of the collective actions of the Individual Defendants. 23 Lion Capital 24 77. Lion Capital is a limited liability partnership with various investment 25 funds incorporated in England where its registered office is located at 21 Grosvenor 26 Place, London, SW1X 7HF. Lion Capital’s United States affiliate (Lion Capital 27 (Americas) Inc.) is located at 888 7th Avenue, 43rd Floor, New York, New York 28

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1 10019. Lion Capital purports to be a recognized leader in investing in consumer 2 businesses and was founded in 2004 by Lea, Robert Darwent and Richardson. At 3 various times during the Class Period, Lea, Richardson and Jacob Capps (“Capps”) 4 were simultaneously partners of Lion Capital and members of American Apparel’s 5 Board. During the Class Period, Lion Capital had the possession, direct or indirect, 6 of the power to direct or cause the direction of the management and policies of 7 American Apparel and the Individual Defendants. 8 CONFIDENTIAL WITNESSES 9 Confidential Witness 1 10 78. CW1 was employed at American Apparel for five and a half years 11 prior to CW1’s departure from the Company in May 2010. CW1 began as a 12 Customer Service Representative, and was later promoted to Supervisor in 13 Customer Service. CW1 sat on the seventh floor of the Company’s downtown 14 facility, which is the same floor where American Apparel executives, including 15 Charney and Kowalewski, had their offices. CW1 reported to Customer Service 16 Manager Pat Honda, who, in turn, reported directly to Charney. CW1 often worked 17 directly with Charney and Chief Operating Officer Marty Bailey. According to 18 CW1, American Apparel hired undocumented workers regularly and did not require 19 employees to provide proper employment documentation. CW1 knew three people 20 in his/her department without proper documentation and believes they quit before 21 ICE formally informed the Company that it would have to dismiss employees in 22 June 2009. 23 Confidential Witness 2 24 79. CW2 was a Manufacturing Division Controller for American Apparel 25 from 2008 through mid-2010. CW2 reported to Corporate Controller Adrian Taylor 26 (“Taylor”), who, in turn, reported to Kowalewski. CW2 was responsible for 27 recording the financial transactions and compiling the financial statements for the 28

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1 Manufacturing Division on a monthly basis. CW2 submitted this information to 2 Taylor, who was responsible for consolidating the information with the Company’s 3 other two divisions – retail and international – into a spreadsheet of financial data 4 for the entire Company. CW2 believes that it was Taylor’s responsibility to inform 5 Kowalewski of any significant variances in the divisions’ financials. According to 6 CW2, the Company tracked purchasing, production, cost of goods sold, inventory, 7 sales and accounts payable through its ERP system, Microsoft Dynamics AX 8 (“AX”). At the end of each month, CW2 downloaded information about sales, 9 inventory and costs from AX into a Microsoft Excel spreadsheet. CW2 then 10 forwarded this information to corporate, or Taylor. 11 80. CW2 monitored the manufacturing division’s employee headcount to 12 determine the impact payroll had on costs. According to CW2, the impact of the 13 dismissals of American Apparel’s manufacturing employees was evident at the 14 Company in 4Q09. The dismissals impacted the Company’s operations with 15 increased labor costs and, at the same time, slower production. There was a mad 16 rush to hire replacement employees starting in June 2009, which resulted in almost 17 double the number of employees in manufacturing positions. The replacement 18 employees lacked skill and experience, which further increased labor costs. The 19 Company’s financial records in July or August 2009 reflected that, while payroll 20 was increasing, productivity was low, and sales were not keeping up with the 21 Company’s bloated expenses. 22 81. According to CW2, American Apparel experienced great difficulty 23 replacing the workers it lost and, by the time CW2 left the Company in June 2010, 24 American Apparel still had not replaced all of the employees that were terminated 25 due to the ICE investigation. CW2 believes that Charney knew in real time about 26 the significant impact caused by the dismissal of manufacturing workers because 27 Charney was heavily involved in every aspect of American Apparel’s operations. 28

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1 82. As a result of the negative impact the workforce reductions had on the 2 Company’s costs, the Company began running afoul of debt covenants in the last 3 quarter of 2009 and the first quarter of 2010. Because the Company’s debt 4 covenants required it to maintain a minimum gross operating profit (“GOP”), its 5 lenders monitored American Apparel’s GOP. The Company calculated its GOP 6 monthly at the corporate level and American Apparel executives closely monitored 7 and managed the debt covenants to avoid breach. Monitoring debt covenants was 8 one of Kowalewski’s key responsibilities. According to CW2, there was a panic at 9 the Company during the fourth quarter of 2009, and the first quarter of 2010 10 because the Company’s GOP fell below the lenders’ requirements. 11 Confidential Witness 3 12 83. CW3, a Distribution/Returns Supervisor from August 2009 through 13 early 2010, reported to Zoreida Candelerio (“Candelerio”) (American Apparel’s 14 Distribution Manager). CW3 started his/her tenure at the Company around the 15 same time many of the undocumented workers were being terminated. CW3, who 16 met Charney on several occasions, stated that it was ridiculous for him to suggest 17 that he did not immediately know about the loss of productivity which occurred 18 following the loss of the undocumented employees because they would be very 19 difficult to replace. The workers hired to replace the skilled undocumented 20 employees, in addition to requiring training, were generally slower than the 21 undocumented workers. In an effort to raise the productivity levels of the returns 22 department, CW3 e-mailed Candelerio on several occasions to request that the 23 Company hire more replacement employees to work in the department. According 24 to CW3, American Apparel had difficulty hiring, and never fully replaced, the 25 terminated workers in the returns department. 26 27 28

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1 Confidential Witness 4 2 84. CW4 was a Production Scheduler from June 2009 through June 2010, 3 who extracted information from American Apparel’s AX system, and incorporated 4 the information into Microsoft Excel spreadsheets in order to determine which 5 products/styles were needed. According to CW4, manufacturing employees who 6 were dismissed after failing to produce ICE documentation were later rehired by 7 American Apparel under different names. 8 Confidential Witness 5 9 85. CW5 was a Resource Assignor in American Apparel’s Production and 10 Planning Department from November 2007 until the beginning of 2010. According 11 to CW5, it was common knowledge within the Company that American Apparel 12 employed undocumented workers. American Apparel’s Human Resources 13 Department coached job applicants who did not have proper work documentation 14 on what they needed to produce to get hired by the Company. According to CW5, a 15 cutting floor employee who stopped working for American Apparel during the ICE 16 investigation in 2009 returned to the Company following the investigation with a 17 different last name. CW5 knew about the individual’s name change because e-mail 18 messages CW5 received from the same individual reflected the name change. 19 86. The workforce reduction due to the ICE investigation in mid-2009 20 negatively affected production because the employees hired to replace the 21 undocumented workers were inexperienced and could not perform their jobs as 22 efficiently. CW5 estimates that the new employees were only producing half as 23 much as the employees who were terminated. CW5’s assertion that the workforce 24 reduction affected production was based on the Company’s delay in bringing 25 certain clothing styles to market. 26 27 28

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1 Confidential Witness 6 2 87. CW6, who was a former employee in American Apparel’s Bundling 3 Section from April 2009 through March 2010, stated that the majority of 4 manufacturing personnel employed at American Apparel lacked the necessary 5 papers to legally work at the Company. CW6 knew this because he/she spoke to 6 employees in CW6’s department who did not have proper documentation. Even 7 CW6’s manager was terminated as a result of the ICE inspection but, one month 8 after he was terminated, the manager was rehired. 9 Confidential Witness 7 10 88. CW7 was a Payroll Administrator at the Company’s corporate 11 headquarters in Los Angeles from 2003 through December 2008, and was 12 responsible for payroll for all domestic retail store employees and corporate 13 employees. According to CW7, Automatic Data Processing, Inc. (“ADP”) served 14 as an outside payroll provider that processed payroll and issued paychecks for retail 15 and corporate employees. CW7 provided ADP with the I-9 information provided 16 by every employee to verify employment eligibility. ADP would verify the I-9 17 information and, if a social security number was incorrect, ADP would request 18 corrected information. When ADP notified the Company of incorrect I-9 19 information, CW7 would review the HR file and provide corrected information to 20 ADP. According to CW7, ADP did not manage the Company’s factory workers’ 21 payroll. Instead, American Apparel employees located on the fifth floor of 22 corporate headquarters were responsible for hiring and issuing paychecks to factory 23 employees. 24 Confidential Witness 8 25 89. CW8 held various positions during his/her employment at American 26 Apparel from late 2005 through mid 2008. From mid 2008 through December 27 2010, CW8 served as a Logistics Manager in the Company’s Los Angeles 28

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1 headquarters. CW8 worked closely with Charney, and described him as being very 2 involved in all aspects of the business. As a Logistics Manager, CW8 was not 3 directly responsible for inventory management, but was involved in the movement 4 of inventory from the warehouse to retail stores. CW8 also worked closely with 5 Warehouse and Distribution Manager Candelario, who was primarily responsible 6 for inventory management. CW8 received his paycheck from ADP and confirmed 7 that Company employees on the fifth floor of Company headquarters handled 8 payroll for warehouse and factory employees. 9 90. As part of his/her duties, CW8 managed the sale of merchandise to the 10 Company’s international subsidiaries and retrieved sales information from 11 American Apparel’s ERP system to incorporate this information into a monthly 12 report that broke down sales by subsidiary. CW8 believed the Company’s 13 inventory tracking system modules communicated well together, thus enabling 14 American Apparel to monitor exactly what type of inventory it had on hand. 15 91. According to CW8, the retail operations department compiled and 16 circulated a daily sales report every morning, which provided the previous day’s 17 sales broken down by retail store. The daily sales report also included the previous 18 seven days’ sales and compared the previous day’s sales year-over-year. The daily 19 sales report was e-mailed to a large distribution list, which included Charney, 20 Kowalewski, certain Board members, department heads and individuals in the 21 accounting department. The accounting department also generated and distributed a 22 daily report that listed the Company’s inventory, raw materials, sales and expenses 23 for the previous day. The daily accounting report was circulated to the same 24 distribution list as the daily sales report, which included both Charney and 25 Kowalewski. 26 27 28

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1 Confidential Witness 9 2 92. CW9 worked in American Apparel’s Human Resources Department 3 from mid-2006 through January 2010. CW9 reported to Director of Human 4 Resources Kristina Moreno and Retail Director Nicole Gabbay (“Gabbay”). 5 Moreno reported to Bailey or Charney. Gabbay reported directly to and worked 6 closely with Charney. Moreno oversaw human resources for both retail and 7 manufacturing and, except for a common manager, these groups were separate. 8 After Moreno’s departure, the Manufacturing Division Human Resources 9 Department reported directly to Bailey. 10 93. According to CW9, the Company learned of the upcoming ICE I-9 11 audit well in advance of the formal November 29, 2007 Inspection Notice. In fall 12 2007, CW9 was directed to begin gathering Forms I-9 for the Company’s retail 13 employees. While Moreno instructed CW9 in the preparation for the I-9 audit, 14 CW9 believed Moreno received directions from or conferred with Crucillo and 15 Charney regarding the audit. CW9 was instructed to make sure all Forms I-9 were 16 filled out correctly and that the employee supplied the necessary supporting 17 documentation. 18 94. Leading up to the I-9 audit, Manufacturing Division Human Resources 19 Department employees gathered manufacturing employees’ Forms I-9. During this 20 time, CW9 spoke with Manufacturing Division Human Resources Department 21 employee Alejandra Flores (“Flores”), who explained that in the process of 22 preparing for the inspection she examined so many documents in succession that it 23 was becoming evident when a document was a fake. Flores illustrated this by 24 showing CW9 copies of numerous social security cards and compared them to one 25 they knew was authentic. According to CW9, it was easy to identify which ones 26 were fake. The Manufacturing Division Human Resources Department was finding 27 that there were a number of employees using fake documents. According to CW9, 28

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1 Moreno and Bailey would have been updating Charney regularly through the 2 Company’s I-9 review process. In addition, in CW9’s experience, Charney would 3 have also been updated on the false documents the Manufacturing Division Human 4 Resources Department employees were finding during the review. 5 Confidential Witness 10 6 95. From August 2006 through approximately March 2008, CW10 served 7 as Executive Assistant to Moreno. In addition to assisting Moreno, CW10 worked 8 on various Human Resources Department projects for manufacturing employees. 9 According to CW10, Moreno left the Company in December 2007. Since the 10 Company did not replace Moreno, after Moreno’s departure, the Human Resources 11 Department employees reported directly to Bailey. 12 96. According to CW10, Flores and another human resources employee 13 handled most of the manufacturing employee hiring but CW10 filled out Forms I-9 14 and W-2 for newly hired manufacturing employees. When filling out a Form I-9, 15 the employees provided identification documentation required pursuant to the Form 16 I-9. CW10 made photocopies of the identification used by the employee and 17 transferred information about the identification onto the Form I-9. According to 18 CW10, the Company did not use a machine or system to confirm or authenticate 19 identification provided by employees. CW10 previously worked for a company 20 that utilized E-Verify, which CW10 said would answer any questions or doubts 21 about an employee’s eligibility to work in the United States. 22 97. CW10 believed that a lot of the identification presented to him/her was 23 not authentic and, consequently, CW10 asked superiors how to confirm the 24 identification’s validity. Moreno, Bailey and other co-workers responded, “we 25 aren’t the IRS.” CW10 asked his/her superiors for guidance because the Forms I-9 26 requires the employer to certify under penalty of perjury that the documents 27 appeared authentic. As a result, when CW10 doubted the authenticity of documents 28

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1 presented in support of employees’ Forms I-9, CW10 refused to sign the Forms I-9 2 and instead gave them to Flores or another human resources employee to sign. 3 CW10 also believes that it was known internally that the Company hired 4 undocumented workers who were not eligible for employment. CW10 felt this was 5 the case because of the I-9 instructions he/she received about accepting 6 documentation from employees at face value. 7 98. According to CW10, the Company spent approximately three months 8 preparing employee Forms I-9 for the audit. During November and December 9 2007, the preparation took on additional urgency, and, as a result, the Human 10 Resources Department worked full time in an attempt to ready the Company for the 11 audit. During this period, the Company also assigned additional employees to work 12 on the audit preparation. In the weeks leading up to the audit, CW10 and his/her 13 co-workers worked extended hours, typically working from 8:00 a.m. to 10:00 p.m. 14 99. Moreno instructed the employees preparing for the audit to confirm 15 that there was a Form I-9 for every employee, review it to make sure it was 16 completed correctly and ensure that there were copies of the accompanying 17 documentation. Moreno was especially focused on making sure no supporting 18 documents were expired. However, the most frequently occurring issue discovered 19 in this preparation was expired documentation. Additionally, many of the 20 employees’ Forms I-9 lacked supporting documentation, were completed 21 incorrectly or only partially completed. When employees were approached about 22 providing missing information or documentation, they typically did not return to 23 work. 24 100. CW10’s supervisors instructed employees preparing for the audit to 25 attempt to fix the partially completed Forms I-9 and, for Forms I-9 not signed 26 within the three day limit, by inserting a date within three days of the employee’s 27 hire date. In other words, they were instructed to forge the dates on the Forms I-9. 28

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1 According to CW10, it would have been easy to forge copies of Forms I-9, but ICE 2 requested originals, which were more difficult to forge, because some of the copies 3 were unreadable. It was also obvious that a number of inauthentic documents 4 accompanied the employees’ Forms I-9. Many alien ID cards were inauthentic 5 because the cards had less than the required nine numbers. Flores typically updated 6 Moreno and Bailey on the progress of the review and the reviewers’ findings. The 7 reviewers provided Bailey with feedback on the review and what they were finding. 8 On separate occasions, CW10 specifically mentioned to Bailey and his assistant, 9 Janet Torres (“Torres”), that the Company had many issues with fake documents. 10 Confidential Witness 11 11 101. CW11 was a former quality assurance employee at the Company from 12 2003 to 2010. CW11 was responsible for conducting quality control inspections of 13 the cutting floor and the quality assurance lab and reported to Bailey. CW11’s 14 position required him/her to be on the manufacturing floor, where he/she inspected 15 completed products. While on the manufacturing floor and when conducting 16 inspections, CW11 observed that new employees were producing fewer products 17 than the employees laid off as a result of the ICE inspection. While conducting 18 inspections, CW11 observed a decrease in the quantity of completed products ( i.e. , 19 decreased production volume) as the laid off employees were being replaced. 20 Further, after the layoffs, product quality also was negatively affected. Prior to the 21 ICE inspection layoffs, the defect rate in completed products was approximately 22 two to three percent; however, when the laid off employees were replaced, the 23 defect rate may have risen up to eight percent. 24 102. The decrease in quantity and the increased defect rate were 25 documented in a Quality Control system, as well as Quality Control reports which 26 Bailey received. The decrease in production and the increase in defects were a 27 result of a substantial number of employees, who had worked at the Company for 28

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1 many years, being laid off. Sewing is muscle memory, and experience matters, thus 2 when the laid off employees were replaced, it took some time for the new 3 employees to get up to speed. The majority of CW11’s staff, with whom he/she had 4 worked for years, was laid off as a result of the inspection. This aggravated CW11, 5 because he/she would have to train new Quality Control employees overnight. 6 CW11 believed that employees who were laid off as a result of the inspection may 7 have been rehired. In his/her opinion, around the time of the ICE inspection, there 8 were instances when CW11 noticed employees, whom he/she had not seen for a 9 period of time, suddenly reappear at the Company. 10 Confidential Witness 12 11 103. CW12 was a contract cost accountant for American Apparel from 12 December 2007 to March 2008 and assisted in American Apparel’s year-end close, 13 as well as with the Company’s 2007 Annual Report. CW12 worked directly with 14 Kowalewski and had direct interaction with Charney and Bailey. CW12 recalled 15 attending several internal conference calls and recalled that Charney argued with 16 Cieply and American Apparel’s outside auditors, Marcum, regarding how to record 17 costs. Charney wanted to write off certain expenses and, when Marcum said that 18 such write-offs were not GAAP compliant, Charney reacted angrily. In addition, 19 according to CW12, American Apparel was not properly tracking its manufacturing 20 costs for 20 to 30 percent of its items and, as a result, was underreporting costs. 21 When CW12 brought this to the attention of Bailey, Bailey reacted angrily. 22 DEFENDANTS’ FRAUDULENT SCHEME 23 104. Throughout the Class Period, Defendants: (i) represented that they 24 made “diligent efforts” to comply with labor and employment regulations, when in 25 fact they had not done so; (ii) falsely represented that many of the Company’s 26 manufacturing employees were “documented immigrants, authorized to work in the 27 United States” and that it was the “Company’s policy, and has been at all times, to 28

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1 fully comply with its obligations to establish the eligibility of prospective 2 employees under immigration law;” (iii) failed to disclose, and made false 3 statements concerning, the Company’s employment practices and its effect on the 4 Company’s operating costs, and gross margins and profits, including the fact that 5 the termination of one-third of the Company workforce would have no “materially 6 adverse impact” on American Apparel; and (iv) misrepresented the Company’s 7 internal and financial reporting controls and financial condition. 8 Defendants Prepare for the I-9 Audit 9 105. On March 29, 2007, ICE initiated an investigation targeting American 10 Apparel, which appeared to be unlawfully employing aliens who are unauthorized 11 to work in the United States, in violation of Title 8, United States Code, Section 12 1324a. The Company learned of the ICE investigation no later than September 13 2007 and immediately began to prepare employees’ Forms I-9 for review. Then 14 Director of Human Resources Moreno, who reported directly to Charney, oversaw 15 the preparations and received directions from, or conferred with Crucillo and 16 Charney, regarding the audit. According to CW10, Moreno instructed employees 17 preparing for the audit to confirm that there was a Form I-9 for every employee, 18 review it to make sure it was completed correctly, and ensure that there were copies 19 of the accompanying documentation. 20 106. In anticipation of the audit, Manufacturing Division Human Resources 21 Department employees reporting to Moreno gathered the employees’ Forms I-9. In 22 November and December 2007, the Human Resources Department worked full time 23 in an attempt to ready the Company for the audit. During this period, the Company 24 assigned additional employees to work on the audit preparation. In the weeks 25 leading up to the audit, CW10 and his/her co-workers worked extended hours 26 preparing for the audit, typically working from 8:00 a.m. to 10:00 p.m. CW9 was 27 instructed to confirm that all Forms I-9 were filled out correctly and that all 28

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1 employees had supplied the necessary supporting documentation. If there was a 2 problem with the Form I-9 or any missing documentation, CW9 was instructed to 3 correct it. 4 107. Moreno instructed employees preparing for the audit to fix any 5 partially or incorrectly completed Forms I-9 by inserting a date within three days of 6 the employee’s hire date – a mandatory immigration law requirement. According to 7 CW10, it would have been easy to forge copies of Forms I-9, but ICE requested 8 originals, which were more difficult to forge, because some of the copies were 9 unreadable. In preparing for the audit, the Company was also focused on ensuring 10 that no supporting documents were expired. The preparation, however, revealed 11 many files with expired documentation. Additionally, many of the employees’ 12 Forms I-9 lacked supporting documentation, and/or were completed incorrectly or 13 only partially completed. When manufacturing employees were approached about 14 providing missing information or documentation, they typically failed to return to 15 work. 16 108. It was obvious that a number of inauthentic documents accompanied 17 the employees’ Forms I-9. For example, many alien ID cards had less than the 18 required nine numbers. Moreno and Bailey – both direct reports to the Individual 19 Defendants – were updated on the progress of the review and the reviewers’ 20 findings. Bailey often came to the Human Resources Department to talk to the 21 entire group working on the Forms I-9 review. The reviewers provided Bailey with 22 feedback on the review and their findings. CW10 specifically told Bailey and his 23 assistant, Torres, that the Company had what appeared to be fake documents. 24 109. CW9 spoke with Manufacturing Division Human Resources 25 Department employee Flores, who explained that many of the documents 26 supporting the manufacturing employees’ Forms I-9 were fake. Flores showed 27 CW9 copies of numerous social security cards and compared them to ones they 28

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1 knew were authentic. The Manufacturing Division Human Resources Department 2 group found a number of employees with inauthentic documents. Moreno and 3 Bailey updated Charney regularly throughout the I-9 review process. 4 American Apparel Is Served With the Inspection Notice 5 110. On November 29, 2007, ICE served American Apparel with the formal 6 Inspection Notice for all current employees working at the Company’s headquarters 7 in Los Angeles. The Inspection Notice stated that it “serve[d] as advance notice 8 that ICE has scheduled a review of your forms.” In addition, it explained that 9 “[d]uring the review, [ICE agents] will discuss the requirements of the law and 10 inspect your Form I-9’s. The purpose of the review is to assess your compliance 11 with the provisions of the law.” The Inspection Notice expressly warned 12 Defendants that ICE/DHS special agents would be on site to review of all Forms I-9 13 for the Company’s employees. 14 111. At 8:30 a.m. on January 3, 2008, ICE agents visited the Company’s 15 headquarters and personally hand-counted the Forms I-9 in front of the Company’s 16 Chief Operating Officer (Bailey), in-house counsel (Crucillo) and outside counsel. 17 Bailey and Crucillo reported directly to Charney and Kowalewski. According to 18 ICE, “[d]uring that inspection, the requirements of the law were discussed and 19 Forms I-9 were inspected.” Despite being asked to certify ICE’s count, Crucillo 20 made a suspicious notation on an ICE document that “[i]nitial hand count was made 21 by U.S. Immigration Customs Enforcement, not verified by company 22 representative.” 23 112. The Company represented that, as of January 2, 2008, there were 3,562 24 manufacturing employees at the Company. However, on January 3, 2008, 25 American Apparel presented only 3,554 Forms I-9 to the ICE agents. In addition to 26 providing 85 fewer Forms I-9 than it had workers, Defendants presented 74 Forms 27 I-9 for employees not on the employee list they presented to ICE. In total, ICE 28

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1 counted 128 substantive violations and 1,390 procedural violations in the Forms I-9 2 the Company presented for review. These violations included: (i) not providing 3 Forms I-9 for certain employees; (ii) failing to note whether the employee is a 4 “Citizen/LPR/Alien;” and (iii) failing to attest the Form I-9 within three days of 5 time of hire. These violations are separate and apart from ICE’s finding that 6 approximately 1,800 workers were not authorized to work in the United States. As 7 a result, as of January 3, 2008, Defendants knew that American Apparel had 8 committed substantive violations of federal immigration laws. 9 113. In addition, Defendants knew that the Company’s manufacturing 10 workforce was largely undocumented. According to CW1, who often worked 11 directly with Charney and Bailey, American Apparel regularly hired undocumented 12 workers and did not require employees to provide proper employment 13 documentation. Likewise, CW6 reported that the majority of the Company’s 14 manufacturing personnel lacked the necessary papers to work legally in the U.S. 15 CW5 stated that it was common knowledge within the Company that American 16 Apparel hired undocumented workers. American Apparel’s Human Resources 17 Department even coached job applicants who did not have proper work 18 documentation on what they needed to produce to get hired. 19 DEFENDANTS FALSE AND MISLEADING STATEMENTS 20 The Class Period Begins With Defendants’ Failure to Timely Disclose the Inspection Notice 21 114. The Class Period begins on November 28, 2007, the day the Company 22 filed its November 2007 Proxy which told investors that “[m]any of American 23 Apparel’s workers are documented immigrants , authorized to work in the United 24 States .” This statement was false and misleading because Defendants had, for over 25 a decade, knowingly employed thousands of undocumented workers at the 26 Company’s Los Angeles garment factory. Defendants’ statement was especially 27 misleading because the November 2007 Proxy highlighted that: 28

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1 Changes to existing U.S. immigration laws or labor laws could affect 2 this labor force and could make it harder for members of such force to 3 remain or legally work in the United States. Any changes in U.S. laws 4 having such an affect could make it harder for American Apparel to 5 maintain and expand its work force, which would be adverse to 6 American Apparel’s manufacturing capabilities and harm American 7 Apparel’s operations and financial results. 8 At the time they made this risk disclosure, however, Defendants were aware that 9 American Apparel’s violations of current U.S. immigration laws were already 10 being uncovered internally, and that the Company’s negative findings would be 11 confirmed by the imminent ICE audit. 12 115. On December 5, 2007, the Company filed its post-effective 13 amendment to prior S-1 Registration Statement on Form S-3, which stated that the 14 “[t]he November 2007 Proxy Statement and all exhibits thereto are incorporated 15 herein by reference and we urge any potential investor in our securities to read it.” 16 This filing incorporated the same false “[m]any of American Apparel’s workers are 17 documented immigrants and authorized to work in the United States” statement 18 from the November 2007 Proxy. On December 11 and 18, 2007, the Company filed 19 press releases on Forms 8-K with details about the Endeavor acquisition. Both 20 press releases advised investors to read the November 2007 Proxy, which contained 21 the false “documented immigrants” statements alleged in ¶114. 22 116. On January 16, 2008, American Apparel filed a press release with the 23 SEC on Form 8-K attaching an investor power point presentation for the 10th 24 Annual ICR XChange Conference being held at the St. Regis Monarch Beach 25 Resort & Spa in Dana Point, California. In the disclosures accompanying the 26 presentation, Defendants listed “ inquiries and investigations and related litigation ” 27 as risks. The disclosures were misleading because Defendants omitted that an 28

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1 investigation had already commenced, that an audit had already taken place, and 2 that substantive immigration law violations had already been found at the 3 Company. For a January 18, 2008 New York Times article entitled “Politics 4 Wrapped in a Clothing Ad,” Charney told the New York Times that American 5 Apparel “was careful to make sure that its workers presented the necessary 6 documentation for employment.” This statement was false and misleading because, 7 at the time Charney made it, he knew that the Company employed thousands of 8 undocumented workers and that American Apparel had virtually no verification 9 systems in place to root out undocumented workers. 10 117. By July 2008, ICE had finished checking the social security numbers 11 of American Apparel employees through its database. According to ICE 12 documents, most of the social security numbers were taken from Forms I-9 but, for 13 those employees for whom American Apparel failed to present Forms I-9, the social 14 security number was taken from a Form DE6. Of the 3,590 social security numbers 15 checked, ICE found that just 26% of them (925) matched the employee named. 16 118. The statements referenced above in ¶¶114-16, supra were false 17 because, at the time they were made, Defendants knew, or were reckless in not 18 knowing, that: (i) American Apparel employed 2,500 undocumented workers in a 19 factory where the Individual Defendants also worked; (ii) the Company had 20 virtually no verification systems in place to verify or root out undocumented 21 workers; (iii) the undocumented workers were like “family” to Charney who said he 22 knew many of them for 10 years; (iv) it was common knowledge at the Company 23 that it employed undocumented workers; (v) American Apparel utilized separate 24 payroll departments and systems for its factory versus retail/corporate employees; 25 (vi) senior management instructed human resources employees to ignore false 26 documentation; (vii) the Company had already committed substantive violations by 27 failing to present Forms I-9 for 85 employees during the January 3, 2008 ICE audit; 28

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1 (viii) the Company’s preparation for the ICE audit had confirmed that many of the 2 Forms I-9 were false, partially completed, not dated within the required three-day 3 period, contained supporting documentation that was expired or clearly fake; and 4 (ix) when employees were asked to correct problems with their Forms I-9, they 5 stopped showing up for work. 6 Defendants Disclose the Inspection Notice 7 119. In March 2008, the Company’s 2007 Annual Report finally disclosed 8 that American Apparel had received the Inspection Notice stating, in pertinent part, 9 that “[i]n late 2007, American Apparel received a notice from [ICE] requesting to 10 inspect the I-9 forms of the employees of American Apparel, Inc. In January 2008, 11 American Apparel provided ICE with access to the requested forms.” The 2007 12 Annual Report, however, continued to be misleading because Defendants failed to 13 also disclose the substantive violations that the Company had already committed, 14 based on their preparation for the audit, and that many more were likely. The 2007 15 Annual Report also grossly misrepresented that the “Company makes diligent 16 efforts to comply with all employment and labor regulations, including 17 immigration laws .”11 18 120. On April 30, 2008, after a series of immigration enforcement raids by 19 the then Bush-led DHS targeting Los Angeles-area companies, American Apparel 20 spokesman Peter Schey publicly threatened that the Company would “come down 21 like a ton of bricks [on ICE and use] the courts and other devices if possible” if 22 American Apparel’s facilities were raided. Schey also misrepresented on the 23 Company’s behalf that “the company’s employees, 4,000 of whom work 24 downtown, were all legal to the best of his knowledge, although he said 25 26 27 11 The Company’s 2008 Annual Report, filed with the SEC on March 16, 2009, repeated this statement. 28

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1 immigration authorities had asked the company to provide documentation on its 2 workers.” 12 3 121. Approximately two weeks later, on May 16, 2008, Charney energized 4 his “Legalize LA ” project. “Legalize LA ” is an American Apparel advertising 5 campaign that uses the plight of undocumented workers to promote the Company’s 6 brand. In a letter he personally signed for the campaign dated May 16, 2008, 7 Charney, in answer to his own question “Why does American Apparel care about 8 immigration reform?” answered: 9 Simple answer: humanity. Self interested answer: because we do 10 everything in Los Angeles...and this city’s economy as a whole is 11 deeply dependant on immigrant labor....If these industries were forced 12 to move offshore...because of stepped-up enforcements, the damage to 13 the economy would be irreparable. But so many of these businesses 14 are, understandably, afraid to speak up. 15 122. American Apparel was not only “deeply dependant” on immigrant 16 labor to manufacture its garments domestically but, in an effort to unfairly highlight 17 the Company’s purported pro-labor/pro-employee “competitive advantages” over 18 other clothing retail brands, Defendants lied to shareholders about the Company’s 19 large undocumented workforce. When Charney earlier admitted to WWD on April 20 11, 2006, “‘[f]or anyone in the apparel industry not to get behind some form of 21 legalization for these [undocumented] workers is to not support the people within 22 your own industry....It’s to cut your nose off to spite your face,’” he was not merely 23 espousing a personal opinion – he was talking about his own Company. 24 123. Defendants also knew that, as a vertically-integrated clothing retailer, 25 manufacturer and distributor, the Company would have grave difficulty filling low- 26 12 27 Ultimately, the Company’s threat was an empty one. Neither Schey nor anyone else at American Apparel came down “like a ton of bricks” or otherwise on 28 ICE after the terminations.

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1 skilled sewing positions with U.S. citizens or other documented workers. Charney 2 himself earlier admitted in the Los Angeles Times on April 20, 2006, “‘I think over 3 50% of the workers in my industry are falsely documented.’” Given the foregoing, 4 one would have expected (as investors did) that Defendants had implemented strong 5 verification systems to ensure that the Company was diligently complying with U.S. 6 federal immigration laws (see ¶16, supra). Defendants not only failed to do so, 7 they, instead, knowingly hired undocumented workers. 8 124. As the I-9 audit intensified, on March 16, 2009, the Company filed its 9 2008 Annual Report which falsely represented that “[i]n January 2008, American 10 Apparel provided ICE with access to the requested forms. American Apparel has 11 not had any further communications with ICE since this request was fulfilled .” 12 Yet, for over 18 months following the January 3, 2008 I-9 audit, Defendants were in 13 constant communication with ICE about the inspection, and were receiving regular 14 updates regarding ICE’s negative findings. In a July 3, 2009 New York Times 15 article entitled “A New Strategy on Illicit Work by Immigrants,” Schey himself 16 acknowledged that there had been “ discussions over 18 months between federal 17 officials and American Apparel, after immigration agents first inspected the 18 company’s files in January 2008 .” 19 125. By April 2009, it was becoming increasingly clear that the Obama 20 administration would not grant amnesty for undocumented immigrants. Instead, the 21 Obama administration sought to enforce existing immigration laws by focusing on 22 employers who knowingly hired undocumented workers – rather than targeting the 23 workers themselves through harsh immigration raids, arrests and deportations. On 24 April 30, 2009, Marcy M. Forman, then DHS Director of Office of Investigations 25 for ICE sent an internal memo to the Assistant Director, Deputy Assistant Directors 26 and Special Agents in Charge articulating President Obama’s new strategy: 27 28

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1 An effective strategy must do all of the following: 1) penalize 2 employers who knowingly hire illegal workers ; 2) deter employers 3 who are tempted to hire illegal workers; and 3) encourage all 4 employers to take advantage of well-crafted compliance tools. 5 126. Only a few months after the Obama administration announced its 6 policy shift, and a year and a half after the I-9 audit started, ICE served a Notice of 7 Intent to Fine, Notice of Suspect Documents and Notice of Discrepancies on 8 American Apparel. The Notice of Intent to Fine was for $149,490 and listed 9 violations, including: (i) failure to properly complete section 2 of Form I-9 for 347 10 employees ($114,510); (ii) failure to ensure employee properly completes section 1 11 of Form I-9 for 21 employees ($6,930); and (iii) no Form I-9 for 85 employees 12 ($28,050). 13 127. The Notice of Suspect Documents informed American Apparel that 14 2,383 of its employees are considered by ICE “not to be authorized to work in the 15 United States.” ICE ultimately concluded that: 16 . “A review of the Forms I-9 for the American Apparel current 17 employees showed that...[a] total of 1946 employees or 85% out of 18 2,293, were using Alien Registration numbers that did not allow 19 them to work in the United States and made them unauthorized to be 20 in the United States .” 21 . “American Apparel committed substantive verification violations on 22 322 of the Forms I-9 of the current employees. This included failing to 23 present 85 Forms I-9 for employees listed on the payroll. American 24 Apparel demonstrated by committing the 322 substantive verification 25 violations that completing the Forms I-9 properly was not a priority 26 for their company .” 27 28

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1 . “American Apparel runs the risk of hiring unauthorized aliens by not 2 preparing Forms I-9 for all of their employees. This can be shown by 3 the large amount of unauthorized aliens employed at their company .”

4 . “American Apparel USA, LLC has a workforce in which a large 5 percent of their workforce are lacking work authorization status and 6 are unauthorized to be in the United States .” 7 Defendants Partially Reveal the Truth About Their Large Undocumented Workforce 8 128. On June 30, 2009, the Company filed a Form 8-K with the SEC, 9 signed by Charney, which stated: 10 On June 24, 2009, ICE notified the Company that it was unable to 11 verify the employment eligibility of approximately 200 current 12 employees because of discrepancies in these employees’ records. 13 Additionally, ICE notified the Company that another approximately 14 1,600 current employees appear not to be authorized to work in the 15 United States and appear to have obtained employment by providing, 16 on Form I-9, documentation which ICE believes, based on its 17 proprietary databases, to be suspect and not valid. 18 129. On July 1, 2009, the Company issued a press release on Form 8-K 19 entitled “American Apparel Announces Developments Regarding Inspection by 20 U.S. Immigration and Customs Enforcement.” The press release revealed that 21 many of the targeted undocumented workers had “worked at American Apparel for 22 as long as a decade ,” confirming that the Company had long failed to comply with 23 immigration laws and that Charney knew many of these employees personally . The 24 release also falsely reiterated that the loss of these workers, who Charney knew so 25 well that he referred to them as “family,” would not materially impact the Company 26 because “the Company presently believes it would only need to hire for a fraction 27 of those employees that would be terminated. The Company currently has a 28

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#:2153

1 significant backlog of active job applications .” The June 30, 2009 press release 2 also falsely represented that it “is the Company’s policy, and has been at all times , 3 to fully comply with its obligations to establish the employment eligibility of 4 prospective employees under immigration laws .” This statement was false for the 5 same reasons set forth in ¶118. 6 130. On July 2, 2009, the New York Post reported that the Company’s 7 immigration compliance failure was “an embarrassment for the racy retail chain’s 8 controversial CEO Dov Charney, who has long portrayed himself as a champion of 9 immigration reform,” and that “the retailer’s legal team scrambled to explain the 10 colossal mess.” The same day, the Los Angeles Times reported that a spokeswoman 11 for ICE commented that, “‘[c]learly, if there is widespread use of Social Security 12 numbers that either are not real or belong to someone other than the person named, 13 we have concerns about possibly a scheme to avoid immigration law....They 14 [American Apparel] are going to be fined no matter what. What’s in question now 15 is the amount of the fine.’” 16 131. As a result of these partial disclosures, half-truths and omissions, the 17 Company’s stock price fell 16% between June 30, 2009 and July 2, 2009 on heavy 18 trading volume. On July 3, 2009, the New York Times reported that Matt Chandler, 19 a spokesman for the DHS, commented that the ICE action at American Apparel 20 “underscore[s] our commitment to targeting employers that cultivate illegal work 21 forces by knowingly hiring and exploiting illegal workers.” 13 Undeterred, 22 Defendants downplayed the financial effects of their immigration law violations. 23 24 25 26 13 On September 30, 2009, Congressman Brian P. Bilbray condemned the 27 Company for the ICE fiasco, stating that American Apparel had “‘become addicted to illegal labor’” and “‘[t]hey seem to think that somehow the law doesn’t matter, 28 that crossing the line from legal to illegal is not a big deal.’”

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Defendants Make False and Misleading Statements 1 and Omissions About the Effects of the Terminations 2 132. Unable to further conceal their U.S. immigration law violations, 3 Defendants changed tactics, falsely telling investors that the impending loss of 4 thousands of the Company’s most important workers would likely have “no 5 material impact” on the Company’s financial results. In the Company’s June 30, 6 2009 press release, Defendants represented that: 7 However, even if the Company were to lose substantially all of the 8 1,800 identified employees (which represent approximately one-third 9 of the 5,600 employees the Company currently employs in its 10 manufacturing operations in the Los Angeles area), the Company does 11 not presently believe that the loss of employees would have a 12 materially adverse impact on its financial results ....The Company 13 believes that its current surplus levels of inventory and 14 manufacturing capacity will mitigate the adverse impact of any 15 disruption to its manufacturing activities that may potentially result 16 from the loss of these employees. 17 133. Defendants repeated this deliberately false statement in: (i) a press 18 release on Form 8-K dated July 1, 2009; (ii) a conference call on August 13, 2009; 19 (iii) an interview with the Los Angeles Times published on September 3, 2009; and 20 (iv) on a November 10, 2009 earnings conference call. On July 2, 2009 the Los 21 Angeles Times quoted Todd Slater from Lazard Capital Markets who stated that, 22 based on the Company’s statements, the terminations “[s]hould have no impact on 23 earnings.” 24 134. Charney, however, knew that hiring and training new factory workers 25 was a laborious and time-consuming process and that the disruptions associated 26 with losing 2,500 of approximately 3,500 of the Company’s most skilled factory 27 workers had resulted in both immediate increased labor costs and slower 28

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#:2155

1 productions. CW3 confirmed that the terminated workers worked at a much faster 2 pace than their replacements and that it was ridiculous for Charney to suggest that 3 he did not know about the loss of productivity which occurred immediately 4 following the loss of the undocumented workers. CW5 similarly stated that the 5 workforce reduction negatively affected production because the employees hired to 6 replace the undocumented workers were inexperienced and could not perform their 7 jobs as efficiently. 8 135. CW5 estimated that the new employees were only producing half as 9 much as the employees who were terminated in 3Q09 and 4Q09. The workforce 10 inefficiencies resulted in a delay in the Company’s bringing clothing styles to the 11 market. For example, in September 2009, American Apparel was still putting out 12 swimwear and summer attire. These facts did not escape Defendants’ notice. 13 CW11, like Charney, conducted regular inspections of the manufacturing floor 14 where CW11 observed a decrease in both the quantity and the quality of the 15 completed products after the employees were lost as a result of the ICE 16 investigation. Specifically, prior to the ICE inspection lay-offs in 3Q09 and 4Q09, 17 the defect rate in completed products was approximately two to three percent. After 18 the undocumented employees left, the defect rate rose to eight percent. These 19 decreases were documented in a Quality Control system, as well as in Quality 20 Control reports regularly received by Bailey – who, in turn, reported directly to the 21 Individual Defendants. 22 136. Defendants were also aware that American Apparel’s costs had 23 increased due to its efforts to quickly replace the lost employees. There was a mad 24 rush to hire replacement employees, which resulted in almost double the number of 25 employees in the manufacturing positions. Indeed, before the Company first began 26 terminating workers in 3Q09, the Company preemptively doubled-up on 27 manufacturing employees to try to stem the anticipated disruptions. According to 28

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#:2156

1 CW2, in June 2009, Defendants doubled-up on workers by having two individuals 2 perform the same tasks, something that was not only inefficient, but caused the 3 Company’s costs to rise substantially. CW2 confirms that between June 2009 and 4 September 2009, American Apparel’s financial reports showed increased payroll 5 and decreased revenues. 6 137. Defendants also received constant updates regarding the Company’s 7 costs and inventory levels and, were aware of the cost increases, decreases in 8 production efficiency, and the faltering quality and quantity of the Company’s 9 output. The Company tracked purchasing, production, sales and accounts payable 10 through its ERP system, AX. AX also tracked inventory and the value of inventory. 11 Each month the financial transactions and statements for each of American 12 Apparel’s divisions were compiled. Corporate Controller Adrian Taylor also 13 informed Kowalewski of any significant variances in the divisions’ financials. 14 138. According to CW8, American Apparel’s retail operations department 15 compiled and circulated a daily sales report that provided the previous day’s sales, 16 broken down by store. Moreover, the Company’s accounting department generated 17 a daily report that listed American Apparel’s inventory, raw materials, sales and 18 expenses for the previous day. Both reports were e-mailed, each day, to Charney 19 and Kowalewski, among others. In addition, CW2 reported that American Apparel 20 had great difficulty replacing the workers it lost and, by the time CW2 left the 21 Company in June 2010, it still had not replaced all of the terminated workers. CW3 22 also confirmed that American Apparel had difficulty hiring, and never fully 23 replaced, the terminated workers in the returns department. These facts stand in 24 stark contrast to the Company’s July 1, 2009 statement ( see ¶¶34, 129, supra), in a 25 press release on Form 8-K, that the workers could be easily replaced and that the 26 Company “would only need to hire for a fraction of those employees that would be 27 terminated.” 28

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#:2157

1 139. The Company’s difficulty in hiring new manufacturing employees, its 2 desperation to get its highly skilled workers back, and Defendants’ willingness to 3 violate immigration laws is best evidenced by the fact that the Company began 4 rehiring the workers that it had been forced to let go. According to CW4, many 5 employees who were dismissed after failing to produce proper ICE documentation 6 were later rehired by American Apparel under different names. CW5 confirms that 7 a cutting floor employee who stopped working for American Apparel during the 8 ICE investigation in 2009 returned to the Company following the investigation with 9 a different last name. Likewise, CW6’s manager was terminated as a result of the 10 ICE inspection but, one month later, was rehired. CW11 corroborated that 11 employees laid off as a result of the inspection were also later rehired. 12 140. In the midst of all of these disruptions, on August 13, 2009, the 13 Company held an earnings conference call with analysts and investors. During the 14 call, the following exchange took place: 15 [Analyst]: Could you give us a quick update on the status of 16 production, particularly given some of the immigration issues that 17 you suffered from? Did you see any disruption? And what were the 18 expenses in the quarter associated with that? 19 [Kowalewski]: Well, given that we received an updated 20 communication from ICE towards the end of the quarter, this would 21 have had no financial impact on the second quarter . 22 [Analyst]: Got you. But your guidance does embed some type of – I 23 guess maybe if you could just give an update on what impact you’ve 24 seen, I guess quarter to date. 25 [Kowalewski]: When we disclosed the ICE notice on July 1, [2009] we 26 indicated that at the time, despite the fact that it was difficult to 27 estimate what the impact would be on our results, we didn’t believe it 28

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#:2158

1 would have a material impact, given the fact that we had effectively 2 hired significant amounts of people at the end of Q2 ‘08. 3 And so, with the decline, also, we were in a situation where we had 4 more labor than was really justified by the amount of business or unit 5 volume that we were seeing. So by – if we were forced to reduce our 6 workforce, the way we would mitigate that would be by increasing the 7 days per week of our employees on the selling floor; so that would 8 virtually pick up all of the reduction in labor that we might see if we 9 had a loss in workers . 10 * * * 11 I think at this point, we don’t have an update on what the financial 12 impact would be. I think we would basically just reiterate what we 13 said at the beginning of July, which is at this point difficult to 14 estimate, but we do not believe that it’s material . 15 141. On the same call, Charney stressed that, even with the loss of workers, 16 American Apparel was positioned to improve margins: 17 [Analyst]: So speaking of the future...your goal still is kind of that 18 double-digit operating margin? 19 [Charney:] Absolutely....We are set up to do more business than we’re 20 doing. We have the real estate; we have the management team – I 21 mean if – we have enough infrastructure to roll an $800 million 22 business in spite of the fact that we’re guiding for a smaller business. 23 So when the – as the economy comes back, as we get better doing what 24 we do, I feel we will get back to those double-digit margins. 25 142. As the Company’s operations continued to unravel throughout 3Q09, 26 Defendants’ efforts to downplay the significance of the terminations intensified. 27 For instance, in a September 3, 2009 Los Angeles Times article, Schey falsely 28

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1 represented that “‘[w]e do not anticipate [the immigration violations] will have a 2 significant impact on American Apparel’s productivity because of the confluence of 3 several factors including the slow economy and high preexisting inventory levels .’” 4 Defendants, however, knew that the Company did not have inventory levels 5 sufficient to offset the diminished efficiency resulting from the loss of its only 6 global manufacturing workforce. Indeed, on May 19, 2010, Charney later blamed 7 the Company’s financial woes on a lack of inventory, stating “[t]here is a hole, in 8 my opinion, of a few hundred thousand pieces not being produced every week.” 9 On November 25, 2009, American Apparel e-mailed ICE, confirming that “all 10 employees identified in the agency’s suspect and discrepancy documents lists have 11 left American Apparel’s employment by failing to show up for work, resigning, or 12 being terminated, an[d] of course are no longer employed by the company.” 13 American Apparel further stated that “almost all of the workers either failed to 14 show for work, resigned from their jobs, or were terminated by September 2009, 15 with a smaller number being terminated by October.” 16 143. On November 10, 2009, two months after almost all of the 17 undocumented workers had departed, the Company held its 3Q09 earnings 18 conference call. During the call, Defendants maintained that their immigration 19 violations were not having any adverse impact on the Company. For instance, 20 Kowalewski stated, “I think what we said back in July [2009] when we had this 21 issue was we didn’t think it was going to have a material impact to our financial 22 results.” Kowalewski also compared the Company’s labor efficiency to the prior 23 year’s, falsely stating, “I think on a year over year basis the efficiency in labor is 24 probably pretty comparable .” Charney similarly falsely described the Company’s 25 transition to new workers resulting from the loss of one-third of the Company’s 26 workforce as “virtually seamless .” The transition had not been “virtually 27 seamless.” 28

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#:2160

1 144. The statements above in ¶¶132-33, 140-43 were false and misleading 2 because: (i) Defendants knew that losing 2,500 of the Company’s most skilled 3 employees was then harming the Company’s efficiencies; (ii) multiple confidential 4 witnesses corroborate that manufacturing quality and quantity had decreased 5 significantly and was apparent; (iii) American Apparel’s costs were skyrocketing 6 due to Defendants’ preemptive hiring of replacement employees; (iv) Defendants 7 reviewed reports that made clear to them that costs were rising and quality and 8 inventory were decreasing; (v) Defendants could not get new styles to their stores, 9 resulting in bathing suits being sent to stores in September 2009; (vi) Defendants 10 knew that the Company was having problems replacing the terminated workers and, 11 as a result, resorted to hiring previously terminated workers who still did not have 12 adequate documentation; (vii) Defendants, who worked in the same building as the 13 manufacturing facilities, saw these negative developments on a daily basis. 14 Defendants Begin to Disclose the Effects of the Terminations 15 145. On March 25, 2010, Defendants were forced to admit that the effects 16 of the terminations had been “substantial” and that the “extended disruption on [the 17 Company’s] operations has been unprecedented.” Further, despite Charney’s 18 statements that production efficiency at the Company had been unaffected, Charney 19 later admitted to The Globe and Mail after the Class Period on October 29, 2010 20 that, “‘[the immigration violations] broke our efficiencies and generated a situation 21 where we were late delivering garments. It lost us an enormous amount of 22 money .’” A March 25, 2010 press release also stated that “[t]he reduction in 23 manufacturing efficiency was principally a result of the forced termination of over 24 1,500 experienced manufacturing employees in the third and fourth quarters of 25 2009 following the completion of the previously disclosed I-9 inspection by U.S. 26 Immigration and Customs Enforcement.” 27 28

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#:2161

1 146. The same day, the Company held a conference call with analysts and 2 investors where Defendants began to disclose, albeit incompletely, some of the 3 adverse consequences stemming from the loss of the Company’s factory workers. 4 For instance, Charney stated: 5 I think there is the employee productivity, and there is factory 6 productivity. The biggest problem has been employee productivity. 7 Two things. One, we have a lot, we lost some of our best people. 8 We’re very saddened about that, and we’re training a lot of new people 9 who are becoming better and better every week that goes by. 10 147. Over the next two trading days, the Company’s stock price fell 22.7% . 11 The disclosure that American Apparel’s understaffed factory was its principal 12 problem stood in sharp contrast to Defendants’ earlier representations that there 13 would be no need to replace most of the lost workers and the terminations would 14 actually benefit the Company because of overstaffing and that, to the extent that the 15 Company did need to hire new workers, there was “significant backlog” of 16 applicants to fill the positions ( see ¶¶34, 39, 129, 132, 140-43, supra). On April 2, 17 2010, the Los Angeles Times pointed out the contradiction, reporting that Charney 18 “initially said that business would barely be affected . He has since changed his 19 tune, now saying that the personnel cuts were ‘a big setback’ to the company and 20 its plans to make more sophisticated products.” 21 148. On March 28, 2010, the New York Post also noted the lie in 22 Defendants explanations: “[a]t the time [of the ICE announcement], the company 23 said the forced firings of about 1,500 workers wouldn’t materially hurt results. But 24 there was a new tune being played last week . ‘The reduction in manufacturing 25 efficiency was principally a result of the forced termination of over 1,500 26 experienced manufacturing employees in the third and fourth quarters of 2009 27 following the completion of the previously-disclosed I-9 inspection by [ICE],’ 28

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#:2162

1 Charney’s battered company said in a statement.” The article further reported that 2 “American Apparel predicts its comparable-store sales will drop 10 percent in the 3 three months ending April 30. A key problem is the understaffed factory , whose 4 output has become less efficient even as it declines .” 5 149. Then on May 19, 2010, the Company issued another damaging press 6 release entitled “American Apparel Reports Preliminary First Quarter 2010 7 Financial Results.” The Company reported a significant drop in its gross margin 8 due, in part, to “reduced labor efficiency.” The Company also explained that the 9 “[t]he reduction in labor efficiency was a result of the dismissal of over 1,500 10 experienced manufacturing employees in the third and fourth quarters of 2009 11 following the completion of an I-9 inspection by U.S. Immigration and Customs 12 Enforcement.” The same day, the Company also stated that it “expects that the 13 reduced manufacturing efficiency at the company’s production facilities beginning 14 during the fourth quarter of 2009 could likely continue through the end of 2010, and 15 could impact the company’s financial results at least through early 2011 .” 16 150. On a same-day conference call following the Company’s May 19, 17 2010 press release, Charney conceded the utter absence of factory employee 18 “stability” that both he and Kowalewski had touted just months earlier ( see ¶¶39, 19 140-43, supra): 20 We didn’t move quickly enough after we had the immigration 21 intervention. We were still in the mode it was a culture....We should 22 have been hiring more people....We are off our game but we are going 23 to get back on our game as far as – in a way the fact that we had this 24 Made in USA factory we are not getting the full benefit of it because 25 actually we don’t have enough people . 26 151. Upon the release of this news, shares of the Company’s stock plunged 27 40.51% , to close on May 19, 2010 at $1.63 per share, on unusually heavy trading 28

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#:2163

1 volume. The Company has not held another conference call with analysts since 2 May 19, 2010. 3 Defendants Mislead Investors About their Purported Strict Business Orthodoxy 4 152. During the Company’s May 13, 2008 earnings conference call for 5 1Q08 which took place after the Wall Street Journal “loser” article appeared ( see 6 ¶47, supra), Charney assured investors that the Company was “looking to build a 7 world class financial team. We want to – we have a very creative company and a 8 creative brand, but we want to pursue a strict corporate orthodoxy as far as financial 9 accounting issues and putting together a team. And we’re studying that and 10 working on that very closely.” Charney knew that American Apparel’s financial 11 accounting practices were anything but “strict,” and that the Company’s internal 12 controls were virtually non-existent. In fact, the Company’s 2010 Annual Report 13 later admitted that the Company lacked internal controls throughout the Class 14 Period (see ¶59, supra). 15 153. According to CW12, just months before assuring investors that 16 Charney claimed he was pursuing a “strict corporate orthodoxy,” Charney was 17 aggressively pushing the Company’s auditor – Marcum – to write off costs in 18 violation of GAAP. 14 The Company was not properly tracking manufacturing costs 19 for 20 to 30 percent of its items and, as a result, was underreporting costs. Far from 20 attempting to improve controls, however, when CW12 brought this to the attention 21 of American Apparel’s senior management, he/she was terminated. 22 154. During the same 1Q08 earnings call, Charney also represented that 23 “[w]e’re going to be making a lot of progress as far as building a world class 24 financial team at American Apparel.” On the Company’s August 14, 2008 25 earnings conference call, Charney again assured investors that the Company’s 26 financial accounting was moving ahead as scheduled, stating that “[o]verall our 27 14 28 Marcum left the Company on April 3, 2009.

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#:2164

1 SOX implementation is on track with us having just completed the assessment 2 phase. We are expected to demonstrate significant progress in our [remediation] of 3 [deficiencies] by year-end [2008]. Since we have assessed and reported on the 4 effectiveness of internal controls, we are in compliance with SOX for our full 5 requirements.” 6 155. On December 24, 2008, Kowalewski, sent the Company’s head of 7 public relations, Ryan Holiday, a series of e-mails. In the first e-mail, Holiday 8 seeks Kowalewski’s assistance responding to an upcoming (and potentially 9 damaging) news story about American Apparel. A short time later, Kowalewski 10 responds to Holiday’s request saying that he did not have time to help with the story 11 because, among other things, “1. We [American Apparel] almost went bankrupt 12 last Friday . I’m sorry but I was busy with that for the past several weeks . 2. I’ve 13 been sick and occupied with other company matters since Friday because we’re 14 hardly out of the woods on #1 [ i.e. , bankruptcy].” 15 156. American Apparel, however, had never previously publicly disclosed 16 that the Company was on the verge of bankruptcy at that point during the Class 17 Period. To the contrary, during the Company’s November 10, 2008 earnings 18 conference call with investors several weeks prior, Kowalewski trumpeted the 19 Company’s financial health, claiming “[wJe’re very pleased with our financial 20 results for the third quarter .” As expected, investors and analysts relied upon 21 Kowalewski’s statement. On November 11, 2008, Mickey M. Schleien, an analyst 22 with Ladenburg, maintained his “Buy” rating for the Company stating that 23 “yesterday evening [on the conference call], APP reported operating results a bit 24 better than expected.” 25 157. And, only a short time after Kowalewski’s December 24, 2008 26 bankruptcy e-mail, the Company held a January 14, 2009 conference call with 27 investors where Kowalewski said “I think if you look at our leverage statistics, we 28

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#:2165

1 have a manageable level of debt[,]” without making any reference to the 2 Company’s liquidity issues. CW1, who often worked directly with Charney and 3 Bailey, learned in late 2008 that the Company was close to filing for bankruptcy. 4 This corroborates that Kowalewski – the Company’s CFO – must have believed 5 that the Company almost went bankrupt in December 2008 when he sent the e-mail 6 to Ryan Holiday that same month. 7 The Market Responds Favorably to Defendants’ Misleading Statements and Omissions About 8 Their Business Practices 9 158. Throughout 2008 and 2009, analysts relayed Defendants’ false 10 messages about the Company’s internal controls and “conservative” corporate 11 stewardship to the market. For example, the Company’s August 2008 2Q08 12 earnings announcement drove American Apparel’s stock price up over 25% to 13 $8.20 per share on August 15, 2008, on extraordinarily high volume of nearly 1.5 14 million shares traded. Similarly, on August 19, 2008, in response to the Company’s 15 2Q08 earnings results, Ladenburg analyst Mickey M. Schleien increased his price 16 target for the Company from $8.00 to $10.50. During the Company’s November 17 10, 2008 earnings conference call for 3Q08, Kowalewski again told investors that 18 the Company’s internal controls progress was still on track, stating, “[o]n the 19 Sarbanes-Oxley front, we continue to be on track and continue to expect to 20 demonstrate significant progress in remediating deficiencies by yearend.” 15 21 159. In response to the Company’s 3Q08 results, Lazard Capital Markets 22 analyst Todd Slater lauded Defendants, saying “congratulations. One of the few 23 bright real spots in this environment.” On March 17, 2009, Mr. Slater again 24 congratulated Defendants for the Company’s 4Q08 and overall 2008 results, stating, 25 “let me congratulate you for hitting numbers that you have guided to over a year 26 15 On January 5, 2009, it was reported that then-CFO Kowalewski sent an 27 American Apparel executive an e-mail that the Company “almost went bankrupt last Friday.” Defendants’ lack of controls clearly extended beyond their dismal 28 financial reporting.

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#:2166

1 ago when the world was a very, very different place...you may be the only retailer

2 guiding to an increase in revenue in ' 09 as well as an expansion in operating 3 margins and an increase in earnings. You are in a pretty elite group there .” 4 Defendants, however, were only “bucking the trend” (as analyst Telsey Advisory 5 Group put it in a November 7, 2008 research report) by misleading the market about 6 the impact the terminations were having on the Company’s financial performance. 7 160. A February 23, 2009 article in trade magazine Advertising Age 8 described American Apparel as the “[b]est-positioned” apparel retailer in the world. 9 A KeyBanc report dated April 22, 2009, highlighted that the Company was 10 “[c]ommitted to best practices. The question was asked about what management 11 views as a Street misperception about the Company, to which management 12 highlighted the flawed view that the Company is disorganized and unsystematic 13 internally. Charney emphasized the Company’s commitment to conservatism and 14 maintaining best practices.” In response to this news, the Company’s stock price 15 jumped 7.66% on April 22, 2009. To further assure investors about the Company’s 16 controls and financial reporting, Defendants hired Deloitte as the Company’s new 17 independent auditor in the spring of 2009. 18 Lion Capital Loans American Apparel $80 Million and Names Three Members 19 to the Company’s Board 20 161. Around the same time, in a press release on Form 8-K dated March 16, 21 2009, American Apparel announced that it had entered into a private financing 22 agreement with Lion Capital for over $80 million in secured second lien notes at a 23 15% interest rate maturing December 31, 2013 with detachable warrants. An April 24 22, 2009 KeyBanc report noted that the partnership with Lion Capital “injected a 25 much needed level of financial discipline” and “provides capital structure [and] 26 increased financial acumen.” The report also said that the Lion Capital deal “may 27 help boost investor confidence about corporate governance at the company.” The 28

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#:2167

1 Lion Financing Agreements gave Lion Capital the right to designate two persons to 2 American Apparel’s Board, in addition to something called a “Board Observer.” 3 As American Apparel Board members, Neil Richardson and Jacob Capps, Lion 4 Capital’s designees, also signed American Apparel’s false 2009 Annual Report. On 5 May 12, 2010, Capps, a Lion Capital Partner and American Apparel Board member 6 resigned from the Board, while remaining as the “Board Observer.” Lion Capital 7 appointed Lea to the Board to replace Capps. 8 162. In a press release announcing Lion Capital’s investment, Charney 9 unequivocally stated that “‘[t]his investment provides us with a long term solution 10 for our capital structure and an enhanced ability to grow our brand both 11 domestically and internationally over the coming years.’” In response to this 12 announcement, American Apparel’s stock price jumped 67.79% on March 13, 2009 13 to close at $2.50 per share, on high volume of over 1.9 million shares. In truth, the 14 Company’s financial condition was so dire that even Lion Capital’s $80 million 15 cash infusion could not provide a “long term solution” for the Company’s weak 16 balance sheet. Only a short time after Lion Capital loaned the Company $80 17 million, on October 1, 2010, American Apparel had to go back to Lion Capital to 18 restructure its credit agreement or face possible bankruptcy. 16 19 163. With Lion Capital’s significant financial interest in the Company and 20 its own partners serving on the Company’s Board, Lion Capital had the power to 21 control the Company’s management and policies at a critical juncture during the 22 Class Period. Indeed, Lion Capital’s first $80 million lifeline to American Apparel 23 was key to the Company’s very survival because, at the time, the Company was 24 16 On April 21, 2011, American Apparel again barely staved off bankruptcy 25 when a group of Canadian investors agreed to provide the Company with up to $45 million. The investors also got warrants to buy an additional $30 million worth of 26 shares over the subsequent six months, also at 90 cents a share. Charney agreed to contribute $700,000 of his own money to the Company. However, unlike other 27 existing investors , whose ownership stakes will be diluted by the issuance of shares to the new investors, Charney’s prior ownership stake can be restored if the 28 Company’s stock price rises.

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#:2168

1 close to defaulting with MSD Capital, L.P. (“MSD”). American Apparel owed 2 Special Opportunity Funds Investments, an arm of MSD, $51 million. 3 American Apparel’s Auditor Resigns and Reports Defendants to the DOJ 4 164. By early 2010, as a direct result of the Company’s immigration law 5 violations and the significant adverse impact those violations had on its financial 6 performance, brand, liquidity and overall business condition, American Apparel 7 was in desperate need of additional financing and covenant waivers. Financing and 8 waivers would be much more difficult to obtain if the Company issued “going 9 concern” qualifications and disclosed the serious deterioration in its financial 10 condition. Under then-existing covenants, some of the Company’s debt 11 immediately came due upon the issuance of such a qualification. To cover up its 12 precarious financial condition, Defendants deliberately withheld this crucial adverse 13 financial information from Deloitte (see ¶¶51-54, supra). 14 165. On May 19, 2010, the Company issued an earnings press release which 15 warned that it was likely to be in default on June 30, 2010 and that this “would have 16 a material adverse impact on the Company’s operations which would result in the 17 need for the Company to modify its current business plan and/or curtail its 18 operations and could affect the Company’s ability to continue operations as a 19 going concern .” Deloitte, however, had just signed an audit opinion on March 31, 20 2010, less than two months prior to the Company’s default which failed to include 21 any such “going concern” language. An auditor is responsible for including such 22 language in their audit report if they believe it is “reasonably possible” that the 23 auditee will go bankrupt within 12 months of the audit financial statement date. See 24 PCAOB §341.02-03, The Auditors Consideration of An Entity’s Ability to Continue 25 as a Going Concern. 26 166. On July 28, 2010, the Company revealed that, effective July 22, 2010, 27 Deloitte had resigned as the Company’s independent public accountant, stating that 28

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#:2169

1 “Deloitte advised the Company that certain information has come to Deloitte’s 2 attention, that if further investigated may materially impact the reliability of either 3 its previously issued audit report or the underlying consolidated financial statements 4 for the year ended December 31, 2009 included in the Company’s 2009 Form 10- 5 K.” In response to this news, American Apparel’s stock declined 14.36%, to $1.55, 6 on heavy trading. Deloitte resigned because, in its own words, it was “no longer 7 willing to rely on management’s representations due to Deloitte’s belief that 8 management withheld from Deloitte the February 2010 monthly financial 9 statements until after the filing of the 2009 Annual Report and made related 10 misrepresentations.” 11 167. Analyst reaction to the news was swift and severe. A KeyBanc report 12 dated July 29, 2010 stated that: 13 After the close American Apparel [] filed an 8-K stating that its auditor 14 Deloitte & Touche, LLP resigned effective July 22, 2010 – we move to 15 NOT RATED from a BUY rating. The filing was unexpected, and 16 while it does not necessarily imply any degree of misstatement, it 17 certainly raises an already high risk profile....The Company replaced 18 Marcum on April 3, 2009 with Deloitte & Touche – we believe in an 19 effort to provide comfort to investors. However, the transition has not 20 gone smoothly and the Company has missed almost every single 21 subsequent SEC filing deadline . This has been in part due to the 22 previous debt covenant issues, but we believe is also in part due to 23 issues between APP and Deloitte...given the high degree of 24 uncertainty we are unable to provide an investment opinion and step to 25 the sidelines. 26 168. On July 30, 2010 the New York Post observed that “Dov Charney 27 continues to rip his company’s stock price to shreds” and had “ skimped on details 28

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#:2170

1 in a securities filing ,” Deloitte had said that the Company’s financial statements for 2 2009 may not be reliable and that it had uncovered information “that if further 3 investigated may materially impact” a previous audit report as well as the retailer’s 4 2009 financial statements. That same day, WWD reported that “[m]any of 5 American Apparel Inc.’s investors took the lead of Deloitte & Touche, the 6 company’s accountant, and split Thursday.” 7 169. Facts later revealed by Deloitte confirm that Defendants knowingly 8 concealed material adverse financial information: 9 Deloitte explained that its conclusion was based on the significance of 10 the declines in operations and gross margin in the Company’s 11 February 2010 monthly financial statement, combined with the 12 January 2010 monthly financial statements , the Company’s issuance 13 of revised projections in early May 2010 which reflected a significant 14 decrease in the Company’s 2010 projections, and Deloitte’s 15 disagreement with the Company’s conclusion that the results shown in 16 the February 2010 monthly financial statements would not have 17 required a revision to the Company’s projections as of the date of the 18 10-K filing and the issuance of Deloitte’s reports. Deloitte further 19 indicated that their decision considered their inability to perform 20 additional audit procedures, their resignation as registered public 21 accountants and their professional judgment that they are no longer 22 willing to rely on management’s representations due to Deloitte’s 23 belief that management withheld from Deloitte the February 2010 24 monthly financial statements until after the filing of the 2009 10-K and 25 made related misrepresentations. 26 170. Then, on August 17, 2010, the last day of the Class Period, the 27 Company issued a press release entitled “American Apparel Reports Preliminary 28

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#:2171

1 Second Quarter 2010 Financial Results.” The press release revealed, in relevant 2 part: 3 Gross margin for the second quarter of 2010 is expected to be in the 4 range of 50% to 52%, as compared to 59.0% for the prior year second 5 quarter. Gross margin was negatively impacted by a shift in mix from 6 retail to wholesale net sales, which generate lower margins, and by 7 lower labor efficiency at the Company’s production facilities in the 8 second quarter of 2010 compared to the prior year period. The lower 9 labor efficiency was primarily a result of the hiring of over 1,600 net 10 new manufacturing workers during the second quarter of 2010, as well 11 as the impact of an increase in the mix of more complex retail styles 12 produced. 13 Loss from operations for the second quarter of 2010 is expected to be 14 in the range of $5 million to $7 million, as compared to income from 15 operations of $7.3 million in the second quarter of 2009. 16 * * * 17 The Company expects to report a substantial loss from operations and 18 negative cash flows from operating activities for the six months ended 19 June 30, 2010. Based on this, and trends occurring in the Company’s 20 business after the second quarter and projected for the remainder of 21 2010, the Company may not have sufficient liquidity necessary to 22 sustain operations for the next twelve months. The Company’s current 23 operating plan indicates that losses from operations are expected to 24 continue through at least the third quarter of 2010. These factors, 25 among others, raise substantial doubt that the Company will be able 26 to continue as a going concern. 27 28

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#:2172

1 171. Over the next two days, as the full truth about Defendants’ 2 misrepresentations was finally digested by the market, American Apparel’s stock 3 price declined rapidly, from $1.39 per share to just $0.75 per share on August 19, 4 2010 – a decline of over 46% on extremely heavy trading volume. 5 Post-Class Period Admissions 6 172. On August 18, 2010, after an interview with Charney, WWD reported 7 that “Charney traced most of the current [financial] problems back to difficulties at 8 the firm’s Los Angeles factory, which hired 1,600 new workers in the second 9 quarter. Last year, American Apparel dismissed workers who could not prove to 10 federal authorities that they had the legal right to work in the U.S. ‘Replacing the 11 workers that we lost in [our] L.A. factory was far more difficult than I anticipated,’ 12 he said. ‘In addition, because the consumer is battered, having the right product at 13 the right time at the right place is more important than ever. But we could not 14 respond quickly enough because of our issues with the factory .’” 15 173. The article further reported that, “[t]he raffish Charney...appeared to 16 run American Apparel as a perennial start-up. Along with that came a lack of 17 operation discipline that has hurt the company. Craig Johnson, president of 18 Customer Growth Partners, said the company has been ‘rapidly going downhill’ 19 with operational problems, issues with management integrity and corporate 20 governance. ‘Any one of these issues is a challenge,’ Johnson said. ‘The 21 combination of two or more can be fatal. Lenders ready to pull the plug is not a 22 cause of the problem, but a result.’” 23 174. Then, on February 7, 2011, American Apparel filed an amendment to 24 its 2009 Annual Report with the SEC. It was the Company’s fourth such 25 amendment to its 2009 Annual Report. The amended 2009 Annual Report was 26 filed to provide investors with “unaudited” financial statements for the year ended 27 December 31, 2009. By this time, things had become so grave at the Company, 28

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#:2173

1 that, in an “Explanatory Note” for the unaudited 2009 Annual Report, Defendants’ 2 outside counsel actually included a meaningless (yet self-serving) disclaimer that 3 the mere filing of the amended 2009 Annual Report was itself “not an admission 4 [that prior filings] included any untrue statement of a material fact or omitted to 5 state a material fact necessary to make the statements therein not misleading.” 17 6 175. In the Company’s December 21, 2010 press release on Form 8-K, 7 Deloitte also stated that, “[s]pecifically, we believe that we requested the February 8 2010 financial information prior to issuing our reports and that management 9 informed us that such information was not available.” These disclosures confirm 10 that Defendants deliberately concealed significant and material adverse information 11 from investors regarding the Company’s rapidly deteriorating financial position and 12 its risk of default – at a time when the Company was issuing purportedly clean 13 financial results and rosy statements about its financial condition. 14 176. Finally, on March 31, 2011 American Apparel filed its 2010 Annual 15 Report with the SEC. The 2010 Annual Report finally provided more (belated) 16 granularity to the Deloitte fiasco, stating, for the first time, that Deloitte’s 17 accusations of fraud against the Company was: 18 based on the significance of the declines in operations and gross 19 margin in the Company’s February 2010 monthly financial statement, 20 combined with the January 2010 monthly financial statements, the 21 Company’s issuance of revised projections in early May 2010 which 22 reflected a significant decrease in the Company’s 2010 projections, 23 and [Deloitte]’s disagreement with the Company’s conclusion that the 24 results shown in the February 2010 monthly financial statements 25 would not have required a revision to the Company’s projections as of 26 17 27 Of course, this paragraph was included many months after the first putative securities class action complaint against the Company was filed in this District on 28 August 25, 2010.

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#:2174

1 the date of the 10-K filing and the issuance of [Deloitte]’s reports. 2 [Deloitte] further indicated that their decision considered their inability 3 to perform additional audit procedures, their resignation as registered 4 public accountants and their professional judgment that they are no 5 longer willing to rely on management’s representations due to 6 [Deloitte]’s belief that management withheld from [Deloitte] the 7 February 2010 monthly financial statements until after the filing of the 8 2009 10-K and made related misrepresentations . 9 * * * 10 The Audit Committee and the Company’s management are currently 11 evaluating these matters . The Audit Committee of the Company has 12 commenced an investigation into the assertions that management 13 withheld the February 2010 monthly financial statements and related 14 misrepresentations. 15 177. The results of the Company’s Audit Committee have yet to be 16 disclosed. 17 LOSS CAUSATION 18 178. The market for American Apparel’s publicly traded securities was 19 open, well-developed and efficient at all relevant times. As a result of Defendants’ 20 materially false and misleading statements and failure to disclose material facts as 21 allege above, American Apparel’s publicly-traded securities traded at artificially 22 inflated prices during the Class Period. Lead Plaintiff and other members of the 23 Class purchased or otherwise acquired American Apparel securities relying upon 24 the integrity of the market price of American Apparel’s securities and market 25 information relating to American Apparel, and have been damaged thereby. 26 179. Throughout the Class Period, Defendants engaged in a fraudulent 27 course of conduct that artificially inflated American Apparel’s stock price and 28

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#:2175

1 operated as a fraud or deceit on Class Period purchasers of American Apparel 2 securities. Defendants achieved this façade of success, growth, responsibility and 3 strong future business prospects by misrepresenting the Company’s compliance 4 with immigration laws, financial responsibility, effect of immigration sanctions, 5 ability to continue as a going concern and true financial condition. Defendants’ 6 false and misleading statements and material omissions had their intended effect, 7 causing American Apparel’s stock to trade at artificially inflated prices throughout 8 the Class Period, reaching as high as $15.60 per share on December 12, 2007. 9 180. The economic loss, i.e. , damages, suffered by Lead Plaintiff and other 10 I members of the Class was a direct result of Defendants’ scheme to conceal their 11 immigration law violations and their effects to artificially inflate the Company’s 12 stock price and the subsequent significant decline in the value of American 13 Apparel’s stock price as the relevant truth was revealed in a series of partial adverse 14 disclosures. When Defendants’ prior misrepresentations were disclosed and 15 became apparent to the market, American Apparel’s stock price fell as the prior 16 inflation came out of American Apparel’s stock price. By the time the market had 17 fully digested these disclosures, American Apparel’s common stock closed at $0.75 18 per share on August 19, 2010. 19 181. Defendants’ false and misleading representations and omissions about 20 the Company’s compliance with immigration laws, financial controls, effect of 21 immigration sanctions, ability to continue as a going concern and true financial 22 condition caused and maintained the artificial inflation in American Apparel’s stock 23 price throughout the Class Period until the facts about the Company’s true financial 24 condition were revealed to the market. These revelations did not happen all at once, 25 but rather were the result of investigation by investors, analysts, ratings agencies 26 and journalists. The timing and magnitude of American Apparel’s securities price 27 declines, as detailed herein, negate any inference that the loss suffered by Lead 28

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#:2176

1 Plaintiff and the Class was caused by changed market conditions or other 2 macroeconomic factors unrelated to Defendants’ fraudulent conduct. 3 182. On June 30, 2009, the Company filed a Form 8-K with the SEC, 4 authored by Charney. The Form 8-K disclosed that the Company had been notified 5 by ICE that “it was unable to verify the employment eligibility of approximately 6 200 current employees because of discrepancies in these employees’ records. 7 Additionally, ICE notified the Company that another approximately 1,600 current 8 employees appear not to be authorized to work in the United States and appear to 9 have obtained employment by providing, on Form I-9, documentation which ICE 10 believes, based on its proprietary databases, to be suspect and not valid.” On July 1, 11 2009, the Company issued a press release entitled, “American Apparel Announces 12 Developments Regarding Inspection by U.S. Immigration and Customs 13 Enforcement.” In response to this news which contradicted Defendants’ prior 14 representations about the Company’s immigration compliance, from June 30 to July 15 2, 2009, the Company’s stock price fell approximately 16%. 16 183. Then, on March 25, 2010, the Company issued a press release entitled 17 “American Apparel Reports Fourth Quarter and Full Year 2009 Financial Results.” 18 In the press release, the Company reported: 19 Gross margin for the fourth quarter of 2009 was 55.0% as compared to 20 54.5% for the prior year fourth quarter. Gross margin was favorably 21 impacted by the depreciation of the U.S. dollar against foreign 22 currencies in the fourth quarter of 2009 compared to the fourth quarter 23 of 2008, and by a continuing shift in mix from wholesale to retail sales, 24 which generate higher gross margins. These factors were largely offset 25 by a substantial reduction in manufacturing efficiency at the 26 company’s production facilities in the fourth quarter of 2009 compared 27 to the prior year period. The reduction in manufacturing efficiency 28

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#:2177

1 was principally a result of the forced termination of over 1,500 2 experienced manufacturing employees in the third and fourth quarters 3 of 2009 following the completion of the previously disclosed I-9 4 inspection by U.S. Immigration and Customs Enforcement. 5 * * * 6 Additionally, gross margin was also negatively impacted by lower 7 capacity utilization of the company’s manufacturing facilities in the 8 first half of 2009, and the substantial reduction in manufacturing 9 efficiency experienced in the fourth quarter of 2009 at the company’s 10 production facilities. 11 184. The March 25, 2010 press release also stated that because of its 12 practice of hiring workers who were ineligible for employment in the U.S., the 13 Company was unable to provide annual financial guidance: 14 Based on the substantial impact of the reduced manufacturing 15 efficiency experienced at the company’s production facilities 16 beginning in the fourth quarter of 2009, and the high level of 17 uncertainty surrounding the duration of the reduction in efficiency, as 18 well as due to uncertainty stemming from the company’s constrained 19 ability to undertake additional investments in its business as a result of 20 certain restrictive financial covenants under the company’s credit 21 facilities, the company has determined to defer providing annual 22 financial guidance for 2010 until it reports its first quarter 2010 23 financial results in early May. 24 185. In response, the next day the Company’s stock price dropped 17.45% 25 to $3.17, on heavy trading of 1.85 million shares. The following trading day, the 26 Company’s stock price dropped an additional 6.31% to $2.97. 27 28

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#:2178

1 186. On May 19, 2010, the Company issued a press release entitled 2 “American Apparel Reports Preliminary First Quarter 2010 Financial Results.” In 3 the press release, the Company disclosed the continuing fallout from its 4 immigration violations: 5 Gross margin for the first quarter of 2010 was 50.4% as compared to 6 57.2% for the prior year first quarter. Gross margin was negatively 7 impacted by a shift in mix from retail to wholesale net sales, which 8 generate lower margins, and by reduced labor efficiency at the 9 company’s production facilities in the first quarter of 2010 compared 10 to the prior year period. The reduction in labor efficiency was a result 11 of the dismissal of over 1,500 experienced manufacturing employees in 12 the third and fourth quarters of 2009 following the completion of an I-9 13 inspection by U.S. Immigration and Customs Enforcement. 14 * * * 15 The company currently expects that the reduced manufacturing 16 efficiency at the company’s production facilities beginning during the 17 fourth quarter of 2009 could likely continue through the end of 2010, 18 and could impact the company’s financial results at least through early 19 2011. The company experienced an improvement in production 20 efficiency in the first quarter of 2010 versus the fourth quarter of 2009, 21 but anticipates a temporary worsening in efficiency during the second 22 quarter of 2010 as additional manufacturing workers will need to be 23 hired and trained to meet a seasonal increased demand for the 24 company’s products. The duration and ultimate financial impact of the 25 inefficiencies is difficult to estimate, and the financial impact in future 26 quarters could differ significantly from the level experienced during 27 the first quarter of 2010. 28

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#:2179

1 187. That day, as a result of the Defendants’ disclosures, which partially 2 revealed the truth regarding the Company’s true financial condition and impact of 3 Defendants’ prior misconduct, the Company’s stock price dropped 40.51%, or 4 $1.11 per share, from the prior day’s close of $2.74 to $1.63, on trading of over 2.8 5 million shares. 6 188. On July 28, 2010, the Company filed a Form 8-K with the SEC. The 7 Form 8-K announced that Deloitte, the Company’s independent registered public 8 accountant, had resigned effective July 22, 2010. The Form 8-K further stated that 9 “Deloitte advised the Company that certain information has come to Deloitte’s 10 attention, that if further investigated may materially impact the reliability of either 11 its previously issued audit report or the underlying consolidated financial statements 12 for the year ended December 31, 2009 included in the Company’s 2009 Form 10- 13 K.” In response to this news, American Apparel’s stock declined 14.36%, to $1.55, 14 on heavy trading. 15 189. Finally, on August 17, 2010, Defendants revealed the full effects of 16 their accounting and immigration shenanigans previously concealed from investors. 17 That day, the Company issued a press release entitled “American Apparel Reports 18 Preliminary Second Quarter 2010 Financial Results.” The press release reported 19 that the Company expected to report a loss of $5 million to $7 million in 2Q10 on 20 net sales of $132 million to $134 million. Moreover, a significant factor in such 21 losses was “lower labor efficiency at the Company’s production facilities in the 22 second quarter of 2010 compared to the prior year period. The lower labor 23 efficiency was primarily a result of the hiring of over 1,600 net new manufacturing 24 workers during the second quarter of 2010.” The press release continued: “[g]ross 25 margin for the second quarter of 2010 is expected to be in the range of 50% to 52%, 26 as compared to 59.0% for the prior year second quarter.” 27 28

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#:2180

1 190. The August 17, 2010, press release also stated for the first time that, as 2 a result of the Company’s poor performance which substantially related to its prior 3 misconduct, its very existence was now in doubt, stating “the Company may not 4 have sufficient liquidity necessary to sustain operations for the next twelve months 5 [which] raise substantial doubt that the Company will be able to continue as a going 6 concern.” On this news, shares of the Company’s stock tumbled 25.9%, to close on 7 August 17, 2010 at $1.03 per share, on heavy trading volume. As the market 8 continued to digest this news, the Company’s stock fell an additional 27.2%, to 9 close on August 19, 2010 at approximately $0.75 per share, on unusually heavy 10 trading volume. 11 PLAINTIFF’S CLASS ACTION ALLEGATIONS 12 191. Plaintiff brings this action as a class action pursuant to Fed. R. Civ. P. 13 23(a) and (b)(3) on behalf of a class of all persons and entities who purchased the 14 publicly traded common stock of American Apparel between November 28, 2007 15 and August 17, 2010, inclusive (the “Class”). Excluded from the Class are 16 Defendants, directors and officers of American Apparel and their families and 17 affiliates. 18 192. The members of the Class are so numerous that joinder of all members 19 is impracticable. The disposition of their claims in a class action will provide 20 substantial benefits to the parties and the Court. While the exact number of Class 21 members is unknown to Plaintiff at the present time and can only be ascertained 22 through appropriate discovery, Plaintiff believes that there are hundreds, if not 23 thousands of members of the Class located throughout the United States. 24 According to the Company’s 2009 Annual Report, American Apparel has over 71 25 million shares of stock outstanding traded on the American Stock Exchange, a 26 national market. 27 28

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#:2181

1 193. There is a well-defined community of interest in the questions of law 2 and fact involved in this case. Questions of law and fact common to the members 3 of the Class which predominate over questions which may affect individual Class 4 members include: 5 (a) Whether the Securities Exchange Act was violated by 6 Defendants; 7 (b) Whether Defendants omitted and/or misrepresented material 8 facts; 9 (c) Whether Defendants’ statements omitted material facts 10 necessary in order to make the statements made, in light of the circumstances under 11 which they were made, not misleading; 12 (d) Whether Defendants knew or recklessly disregarded that their 13 statements were false and misleading; 14 (e) Whether the prices of American Apparel securities were 15 artificially inflated; and 16 (f) The extent of damage sustained by Class members and the 17 appropriate measure of damages. 18 194. Plaintiff’s claims are typical of those of the Class because Plaintiff and 19 the Class sustained damages from Defendants’ wrongful conduct. 20 195. Plaintiff will adequately protect the interests of the Class and has 21 retained counsel who are experienced in class action securities litigation. Plaintiff 22 has no interests which conflict with those of the Class. 23 196. A class action is superior to other available methods for the fair and 24 efficient adjudication of this controversy. Plaintiff knows of no difficulty to be 25 encountered in the management of this action that would preclude its maintenance 26 as a class action. 27 28

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#:2182

APPLICABILITY OF PRESUMPTION OF RELIANCE: 1 FRAUD ON THE MARKET DOCTRINE 2 197. Plaintiff will rely upon the presumption of reliance established by the 3 fraud-on-the-market doctrine in that, among other things: 4 (a) Defendants made public misrepresentations or failed to disclose 5 material facts during the Class Period; 6 (b) The omissions and misrepresentations were material; 7 (c) The Company’s securities traded in an efficient market; 8 (d) The misrepresentations alleged would tend to induce a 9 reasonable investor to misjudge the value of the Company’s securities; and 10 (e) Plaintiff and other members of the Class purchased American 11 Apparel securities between the time Defendants misrepresented or failed to disclose 12 material facts and the time the true facts were disclosed, without knowledge of the 13 misrepresented or omitted facts. 14 198. At all relevant times, the market for American Apparel securities was 15 efficient for the following reasons, among others: (a) as a regulated issuer, 16 American Apparel filed periodic public reports with the SEC; and (b) American 17 Apparel regularly communicated with public investors via established market 18 communication mechanisms, including through regular disseminations of press 19 releases on the major news wire services and through other wide-ranging public 20 disclosures, such as communications with the financial press, securities analysts and 21 other similar reporting services. 22 Applicability of the Affiliated Ute Presumption of Reliance 23 199. Plaintiff is also entitled to the Affiliated Ute presumption of reliance 24 because Defendants’ fraudulent scheme also involved a failure to disclose and/or 25 concealment of material facts concerning Defendants’ overall financial condition 26 and operations, information which the market was entitled to know and which may 27 28

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#:2183

1 have caused investors not to purchase shares of American Apparel at the prices they 2 traded at during the Class Period. 3 NO SAFE HARBOR 4 200. Defendants’ verbal “Safe Harbor” warnings accompanying their oral 5 forward-looking statements issued during the Class Period were ineffective to 6 shield those statements from liability. 7 201. The Defendants are also liable for any false or misleading forward- 8 looking statements pleaded because, at the time each forward-looking statement 9 was made, the speaker knew the forward-looking statement was false or misleading 10 and the forward-looking statement was authorized and/or approved by an executive 11 officer of American Apparel who knew that the forward-looking statement was 12 false. None of the historic or present tense statements made by Defendants were 13 assumptions underlying or relating to any plan, projection or statement of future 14 economic performance, as they were not stated to be such assumptions underlying 15 or relating to any projection or statement of future economic performance when 16 made, nor were any of the projections or forecasts made by Defendants expressly 17 related to or stated to be dependent on those historic or present tense statements 18 when made. 19 FIRST CLAIM 20 Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder 21 Against All Defendants (Except Lion Capital) 22 202. Plaintiff repeats and realleges each and every allegation contained 23 above as if fully set forth herein. 24 203. During the Class Period, American Apparel and the Individual 25 Defendants carried out a plan, scheme and course of conduct which was intended to 26 and, throughout the Class Period, did: (i) deceive the investing public, including 27 Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and 28

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#:2184

1 other members of the Class to purchase American Apparel securities at artificially 2 inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, 3 these Defendants, and each of them, took the actions set forth herein. 4 204. American Apparel and the Individual Defendants: (i) employed 5 devices, schemes, and artifices to defraud; (ii) made untrue statements of material 6 fact and/or omitted to state material facts necessary to make the statements not 7 misleading; and (iii) engaged in acts, practices, and a course of business which 8 operated as a fraud and deceit upon the purchasers of the Company’s securities in 9 an effort to maintain artificially high market prices for American Apparel securities 10 in violation of §10(b) of the Exchange Act and Rule 10b-5. These Defendants are 11 sued either as primary participants in the wrongful and illegal conduct charged 12 herein or as controlling persons. 13 SECOND CLAIM 14 Violation of Section 20(a) of the Exchange Act Against the Individual Defendants and Lion Capital 15 205. Plaintiff repeats and realleges each and every allegation contained 16 above as if fully set forth herein. 17 206. The Individual Defendants acted as controlling persons of American 18 Apparel within the meaning of §20(a) of the Exchange Act as alleged herein. By 19 virtue of their high-level positions, and their ownership and contractual rights, 20 participation in and/or awareness of the Company’s operations and/or intimate 21 knowledge of the false financial statements filed by the Company with the SEC and 22 disseminated to the investing public, the Individual Defendants had the power to 23 influence and control and did influence and control, directly or indirectly, the 24 decision-making of the Company, including the content and dissemination of the 25 various statements which Plaintiff contends are false and misleading. These 26 Defendants were provided with or had unlimited access to copies of the Company’s 27 reports, press releases, public filings and other statements alleged by Plaintiff to be 28

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1 misleading prior to and/or shortly after these statements were issued and had the 2 ability to prevent the issuance of the statements or cause the statements to be 3 corrected. 4 207. Beginning in March 2009, Lion Capital acted as a controlling person of 5 American Apparel within the meaning of §20(a) of the Exchange Act as alleged 6 herein. By virtue of its high-level positions, and its ownership and contractual 7 rights, participation in and/or awareness of the Company’s operations and/or 8 intimate knowledge of the false financial statements filed by the Company with the 9 SEC and disseminated to the investing public, Lion Capital had the power to 10 influence and control and did influence and control, directly or indirectly, the 11 decision-making of the Company, including the content and dissemination of the 12 various statements which Plaintiff contends are false and misleading. Lion Capital 13 provided with or had unlimited access to copies of the Company’s reports, press 14 releases, public filings and other statements alleged by Plaintiff to be misleading 15 prior to and/or shortly after these statements were issued and had the ability to 16 prevent the issuance of the statements or cause the statements to be corrected. For 17 instance, Lion Capital (and American Apparel Board) members Richardson and 18 Capps signed the Company’s 2009 Annual Report . 19 208. Each of the Individual Defendants had direct and supervisory 20 involvement in the day-to-day operations of the Company and, therefore are 21 presumed to have had the power to control or influence the particular transactions 22 giving rise to the securities violations as alleged herein, and exercised the same. 23 209. As set forth above, American Apparel and the Individual Defendants 24 each violated §10(b) of the Exchange Act and Rule 10b-5 by their acts and 25 omissions as alleged in this Complaint. By virtue of their positions as controlling 26 persons, the Individual Defendants are liable pursuant to §20(a) of the Exchange 27 Act. As a direct and proximate result of these Defendants’ wrongful conduct, 28

87

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1 Plaintiff and other members of the Class suffered damages in connection with their 2 purchases of the Company's securities during the Class Period. In addition, Lion 3 Capital's financial interest in the Company gave Lion Capital a nearly 20% 4 ownership interest in American Apparel and the stock warrants given to Lion 5 Capital, if exercised, could have diluted Charney's American Apparel equity stake 6 from majority to a non-majority stock owner. 7 WHEREFORE, Plaintiff prays for relief and judgment, as follows: 8 A. Determining that this action is a proper class action under Rule 23 of 9 the Federal Rules of Civil Procedure; 10 B. Awarding compensatory damages and equitable relief in favor of 11 Plaintiff and the other Class members against all Defendants, jointly and severally, 12 for all damages sustained as a result of Defendants' wrongdoing, in an amount to be 13 proven at trial, including interest thereon; 14 C. Awarding Plaintiff and the Class their reasonable costs and expenses 15 incurred in this action, including counsel fees and expert fees; and 16 D. Such equitable and other relief as the Court may deem just and proper. 17 JURY TRIAL DEMANDED 18 Plaintiff hereby demands a trial by jury. 19 DATED: February 27, 2012 KESSLER TOPAZ MELTZER & CHECK, LLP 20 By sr_ 21 Ramzi Abadou 22 Eli R. Greenstein Stacey M. Kaplan 23 Erik D. Peterson 580 California Street, Suite 1750 24 San Francisco, CA 94104 Telephone: (415) 400-3000 25 Facsimile: (415) 400-3001 26 Lead Counsel for Lead Plaintiff Charles Rendelman 27 28

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1 DECLARATION OF SERVICE BY E-MAIL AND MAIL 2 I, the undersigned, declare: 3 1. That declarant is and was, at all times herein mentioned, a citizen of 4 the United States and employed in the City and County of San Francisco, over the 5 age of 18 years, and not a party to or interested party in the within action; that 6 declarant's business address is 580 California Street, Suite 1750, San Francisco, CA 7 94104. 8 2. That on February 27, 2012, declarant served the First Amended Class 9 Action Complaint For Violation of Federal Securities Laws via e-mail and by 10 depositing a true copy thereof in a United States mailbox at San Francisco, 11 California in a sealed envelope with postage thereon fully prepaid and addressed to 12 the following parties: 13 Harriet S. Posner Peter Bradley Morrison 14 Gila D. Jones Skadden Arps Slate Meagher & Flom 15 300 South Grand Ave, Suite 3400 Los Angeles, CA 90071-3144 16 E-mail: [email protected] E-mail: [email protected] 17 E-mail: gilaones@skad'den.comj 18 Seth A. Aronson Amy J. Longo 19 Jennifer H. Cheng Lindsay Lara Geida 20 O'Melveny and Myers LLP 400 South Hope Street 21 Los Angeles, CA 90071 E-mail: [email protected] 22 E-mail: [email protected] E-mail: enniferchengomm .com 23 E-mail: igeidagomm.com 24 Michael G. Freedman Chet A. Kronenbe rg 25 Sim son Thacher & Bartlett LLP 1999 Avenue of the Stars, 29th Floor 26 Los Angeles, CA 90067 E-mail: [email protected] 27 E-mail: ckronenbergstblaw.com 28 Case 2 :10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 91 of 99 Page ID

I #:2188

1 I declare under penalty of perjury under the laws of the United States of 2 America that the foregoing is true and correct. Executed on February 27, 2012, at 3 San Francisco, California. 4 &• _4 5 \Cynthia Sheiard , 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 92 of 99 Page ID

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EXHIBIT A Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 93 of 99 Page ID

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OMB No. 1615-0047; Expires 08/31/12 Form 1-9, Employment Department of Homeland Security U.S. Citizenship and Immigration Services Eligibility Verification

Instructions Read all instructions carefully before completing this form.

Anti-Discrimination Notice. It is illegal to discriminate against in Section 2 evidence of employment authorization that any individual (other than an alien not authorized to work in the contains an expiration date (e.g., Employment Authorization United States) in hiring, discharging, or recruiting or referring for a Document (Form 1-766)). fee because of that individuals national origin or citizenship status. Preparer/Translator Certification It is illegal to discriminate against work-authorized individuals. Employers CANNOT specify which document(s) they will accept The Preparer/Translator Certification must be completed if from an employee. The refusal to hire an individual because the Section 1 is prepared by a person other than the employee. A documents presented have a future expiration date may also preparer/translator may be used only when the employee is constitute illegal discrimination. For more information, call the unable to complete Section 1 on his or her own. However, the Office of Special Counsel for Immigration Related Unfair employee must still sign Section 1 personally. Employment Practices at 1-800-255-8155. Section 2, Employer

What Is the Purpose of This Form" For the purpose of completing this form, the term "employer" means all employers including those recruiters and referrers The purpose of this form is to document that each new for a fee who are agricultural associations, agricultural employee (both citizen and noncitizen) hired after November employers, or farm labor contractors. Employers must 6, 1986, is authorized to work in the United States. complete Section 2 by examining evidence of identity and employment authorization within three business days of the date employment begins. However, if an employer hires an NN hen Sh.,tjl(J Iirni 1-9 Re I sed? individual for less than three business days, Section 2 must be All employees (citizens and noncitizens) hired after November completed at the time employment begins. Employers cannot 6, 1986, and working in the United States must complete specify which document(s) listed on the last page of Form I-9 Form 1-9. employees present to establish identity and employment authorization. Employees may present any List A document Fitlinti Out Form 19 OR a combination of a List B and a List C document. If an employee is unable to present a required document (or Section 1, Employee documents), the employee must present an acceptable receipt This part of the form must be completed no later than the time in lieu of a document listed on the last page of this form. of hire, which is the actual beginning of employment. Receipts showing that a person has applied for an initial grant Providing the Social Security Number is voluntary, except for of employment authorization, or for renewal of employment employees hired by employers participating in the USCIS authorization, are not acceptable. Employees must present Electronic Employment Eligibility Verification Program (E- receipts within three business days of the date employment Verify). The employer is responsible for ensuring that begins and must present valid replacement documents within Section 1 is timely and properly completed. 90 days or other specified time.

Noncitizen nationals of the United States are persons born in Employers must record in Section 2: American Samoa, certain former citizens of the former Trust Territory of the Pacific Islands, and certain children of 1. Document title; noncitizen nationals born abroad. 2. Issuing authority; 3. Document number; Employers should note the work authorization expiration 4. Expiration date, if any; and For employees who indicate date (if any) shown in Section 1. 5. The date employment begins. an employment authorization expiration date in Section 1, employers are required to reverify employment authorization Employers must sign and date the certification in Section 2. for employment on or before the date shown. Note that some Employees must present original documents. Employers may, employees may leave the expiration date blank if they are but are not required to, photocopy the document(s) presented. aliens whose work authorization does not expire (e.g., asylees, If photocopies are made, they must be made for all new hires. refugees, certain citizens of the Federated States of Micronesia Photocopies may only be used for the verification process and or the Republic of the Marshall Islands). For such employees, must be retained with Form 1-9. Employers are still reverification does not apply unless they choose to present responsible for completing and retaining Form 1-9.

Form 1-9 (Rev. 08/07/09) Y Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 94 of 99 Page ID

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For more detailed information, you may refer to the Information about E-Verify, a free and voluntary program that USCIS Handbook for Employers (Form M-274). You may allows participating employers to electronically verify the obtain the handbook using the contact information found employment eligibility of their newly hired employees, can be under the header "USCIS Forms and Information." obtained from our website at www.uscis.gov/e-verify or by calling 1-888-464-4218. Section 3, Updating and Reverification General information on immigration laws, regulations, and Employers must complete Section 3 when updating and/or procedures can be obtained by telephoning our National reverifying Form 1-9. Employers must reverify employment Customer Service Center at 1-800-375-5283 or visiting our authorization of their employees on or before the work Internet website at www.uscis.gov . authorization expiration date recorded in Section 1 (if any). Employers CANNOT specify which document(s) they will accept from an employee. )toc()I)N ing and Retaining Form 1-9 A. If an employees name has changed at the time this form A blank Form 1-9 may be reproduced, provided both sides are is being updated/reverified, complete Block A. copied. The Instructions must be available to all employees B. If an employee is rehired within three years of the date completing this form. Employers must retain completed Form this form was originally completed and the employee is I-9s for three years after the date of hire or one year after the still authorized to be employed on the same basis as date employment ends, whichever is later. previously indicated on this form (updating), complete Form 1-9 may be signed and retained electronically, as Block B and the signature block. authorized in Department of Homeland Security regulations C. If an employee is rehired within three years of the date at 8 CFR 274a.2. this form was originally completed and the employee's work authorization has expired or if a current employee's work authorization is about to expire P riN acN Act Notice (reverification), complete Block B; and: The authority for collecting this information is the 1. Examine any document that reflects the employee Immigration Reform and Control Act of 1986, Pub. L. 99-603 is authorized to work in the United States (see List (8 USC 1324a). A or C); This information is for employers to verify the eligibility of 2. Record the document title, document number, and individuals for employment to preclude the unlawful hiring, or expiration date (if any) in Block C; and recruiting or referring for a fee, of aliens who are not 3. Complete the signature block. authorized to work in the United States. Note that for reverification purposes, employers have the option of completing a new Form 1-9 instead of completing This information will be used by employers as a record of Section 3. their basis for determining eligibility of an employee to work in the United States. The form will be kept by the employer and made available for inspection by authorized officials of \\ Is the Filing Fee? thit the Department of Homeland Security, Department of Labor, and Office of Special Counsel for Immigration-Related Unfair There is no associated filing fee for completing Form 1-9. This Employment Practices. form is not filed with USCIS or any government agency. Form 1-9 must be retained by the employer and made available for Submission of the information required in this form is inspection by U.S. Government officials as specified in the voluntary. However, an individual may not begin employment Privacy Act Notice below. unless this form is completed, since employers are subject to

---. ,.--- .-. civil or criminal penalties if they do not comply with the USCIS Forms and Information Immigration Reform and Control Act of 1986.

To order USCIS forms, you can download them from our website at www.uscis.gov/forms or call our toll-free number at 1-800-870-3676. You can obtain information about Form 1-9 from our website at www.uscis.gov or by calling 1-888-464-4218.

EMPLOYERS MUST RETAIN COMPLETED FORM 1-9 Form 1-9 (Rev. 08/07/09) Y Page 2 DO NOT MAIL COMPLETED FORM 1-9 TO ICE OR USCIS Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 95 of 99 Page ID

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LPapet-NNorkReduction Act An agency may not conduct or sponsor an information collection and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The public reporting burden for this collection of information is estimated at 12 minutes per response, including the time for reviewing instructions and completing and submitting the form. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to: U.S. Citizenship and Immigration Services, Regulatory Management Division, 111 Massachusetts Avenue, N.W., 3rd Floor, Suite 3008, Washington, DC 20529-2210. OMB No. 1615-0047. Do not mail your completed Form 1-9 to this address.

Form 1-9 (Rev. 08/07/09) Y Page 3 Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 96 of 99 Page ID

#:2193 OMB No. 1615-0047; Expires 08/31/12 Department of Homeland Security Form 1-9, Employment U.S. Citizenship and Immigration Services Eligibility Verification

Read instructions carefully before completing this form. The instructions must be available during completion of this form. ANTI-DISCRIMINATION NOTICE: It is illegal to discriminate against work-authorized individuals. Employers CANNOT specify which document(s) they will accept from an employee. The refusal to hire an individual because the documents have a future expiration date may also constitute illegal discrimination. Section 1. Emi and Verification (To be Print Name: Last First Middle Initial I Maiden Name

Address (Street Name and Numbe;) Apt. # I Date of Birth (month/day/year)

Security #

I attest, under penalty of perjury, that I am (check one of the following): I am aware that federal law provides for A citizen of the United States imprisonment and/or fines for false statements or use of false documents in connection with the A noncitizen national of the United States (see instructions) completion of this form. A lawful permanent resident (Alien #) An alien authorized to work (Alien # or Admission 8) - until (expiration date, if applicable - month/day/year) Employees Signature Date (month/day/year) Preparer and/or Translator Certification (To be completed and signed ifSection 1 is prepared by aperson other than the employee) lattest, under penalty ofperjury, that I have assisted in the completion of this form and that to the best of my knowledge the information is true and correct. Preparer's/Translator's Signature Name

Address (Street Name and Number, City, State, Zip Code) I Date (month/day/year)

Section 2. Employer Review and Verification (To be completed and signed by employer. Examine one document from List A OR examine one document from List B and one from List C, as listed on the reverse of this form, and record the title, number, and expiration date, if any, of the document(s)) List A OR List B AI'jQ. List C Document title: Issuing authority: Document #: Expiration Date ((f any): Document #: Expiration Date (f any): CERTIFICATION: I attest, under penalty of perjury, that! have examined the document(s) presented by the above-named employee, that the above-listed document(s) appear to be genuine and to relate to the employee named, that the employee began employment on (month/day/year) and that to the best of my knowledge the employee is authorized to work in the United States. (State employment agencies may omit the date the employee began employment.)

C. If employee's previous grant of work authorization has expired, provide the infonnation below for the document that establishes current employment authorization. Document Title: Document 8: Expiration Date (f any): I attest, under penalty of perjury, that to the best of my knowledge, this employee is authorized to work in the United States, and if the employee presented document(s), the document(s) I have examinedappear to be genuine and to relate to the individual. - or

Form 1-9 (Rev. 08/07/09) Y Page 4 Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 97 of 99 Page ID

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LISTS OF ACCEPTABLE DOCUMENTS All documents must be unexpired LIST A LIST B LIST C Documents that Establish Both Documents that Establish Documents that Establish Identity and Employment Identity Employment Authorization Authorization OR AND

1. U.S. Passport or U.S. Passport Card 1. Driver's license or ID card issued by 1. Social Security Account Number a State or outlying possession of the card other than one that specifies United States provided it contains a on the face that the issuance of the photograph or information such as card does not authorize 2. Permanent Resident Card or Alien name, date of birth, gender, height, employment in the United States Registration Receipt Card (Form eye color, and address 1-551) 2. Certification of Birth Abroad 2. ID card issued by federal, state or issued by the Department of State 3. Foreign passport that contains a local government agencies or (Form FS-545) temporary 1-551 stamp or temporary entities, provided it contains a 1-551 printed notation on a machine- photograph or information such as readable immigrant visa name, date of birth, gender, height, 3. Certification of Report of Birth eye color, and address issued by the Department of State (Form DS-1350) 4. Employment Authorization Document 3. School ID card with a photograph that contains a photograph (Form 1-766) 4. Voter's registration card 4. Original or certified copy of birth certificate issued by a State, 5. In the case of a nonimmigrant alien 5. U.S. Military card or draft record county, municipal authority, or authorized to work for a specific ______territory of the United States bearing an official seal employer incident to status, a foreign 6. Military dependent's ID card passport with Form 1-94 or Form I-94A bearing the same name as the 7. U.S. Coast Guard Merchant Mariner passport and containing an 5. Native American tribal document Card endorsement of the alien's nonimmigrant status, as long as the 8. Native American tribal document period of endorsement has not yet expired and the proposed 6. U.S. Citizen ID Card (Form 1-197) 9. Driver's license issued by a Canadian employment is not in conflict with government authority any restrictions or limitations identified on the form For persons under age 18 who 7. Identification Card for Use of are unable to present a Resident Citizen in the United document listed above: States (Form 1-179) 6. Passport from the Federated States of Micronesia (FSM) or the Republic of the Marshall Islands (RMI) with 10. School record or report card 8. Employment authorization Form 1-94 or Form I-94A indicating ______document issued by the Department of Homeland Security nonimmigrant admission under the 11. Clinic, doctor, or hospital record Compact of Free Association Between the United States and the 12. Day-care or nursery school record FSM or

Illustrations of many of these documents appear in Part 8 of the Handbook for Employers (M-274) Form 1-9 (Rev. 08/07/09) Y Page 5 Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 98 of 99 Page ID

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EXHIBIT B Body Magazine // Fashion News // American Apparel: New Cfo

Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 99 of 99 Page ID

#:2196

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American Apparel: New Cfo First name:*

(Filed Under Fashion News). American Apparel has announced Adrian Kowalewski Last name:* as its new chief financial officer and a a executive vice president. Email:* CL 4 I Kowaleski has been working with Company:* American Apparel since 2006 serving as the company’s director of corporate finance and development where his responsibilities Phone:* included finance, corporate strategy and investor relations. Under his new position, I am a: * I I Kowaleski will oversee financial Retailer Adrian Kowalewski management, accounting and financial Messages: (select all that apply)Address:* reporting. Trade Readers:

El I am a STORE BUYER or OWNER “The board of directors is very pleased that Adrian has agreed to take on the added responsibility of City: El I am a Manufacturer’s Rep serving as CFO,” said Dov Charney, chairman and chief executive officer. “In light of his past El I am a Distributor contributions to American Apparel, and his efforts over the past six months in helping build the State:* I am a Textile Supplier accounting and finance functions at the company, both I and the rest of the board have full confidence Ll I am a Banker or Factor that he will serve the company well in this new leadership role. Zip:* El I am an OEM Producer see more El I want to receive more info from this company about its products more Fashion News >> Country:* Ll I want to receive a catalog from this company I want to learn more about carrying this brand Published 01-05-2009 by Bruna Fernandes in my store; have them contact me El I would like to become a manufacturer’s Related Articles representative for this company; have them contact American Apparel 3Q Sales -2.9% me American Apparel Cites 34% 2Q Drop El I want to comment on this brand American Apparel: New Cfo El I am a store owner/buyer who would Aafa Forms Product Safety Council recommend this brand to other stores

Consumer Readers: Ll I am a CONSUMER Comment on this article, brand or product El I am a consumer who wants to purchase garments from this company; have someone contact me El I am a consumer who wants to know how/where to purchase this product

Disclaimer: The views expressed in comments published on bodymagazine.us are those of the El I am a consumer who would like a consumer catalog, if you provide one comment writers alone. They do not represent the views or opinions of Bodymagazine or its staff. El I am a consumer who would recommend this brand

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