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Home , American Apparel, Dov Charney

Don Charney’s Sleazy Struggle for Control of

By Susan Berfield

When I first reach on been in crisis as American Apparel 2011, Irene Morales, a sales associ- June 24, he’s scrambling to raise lost $270 million and came close to ate, accused Charney of using her as money, find a partner, try anything bankruptcy twice. But the board had a sex slave and sought damages of a to get his company back. His hand- stuck by him, sales had increased quarter-billion dollars. An arbitrator picked board of directors had ousted this spring, and summer promised to dismissed those claims but found the him from American Apparel six days be busier yet. Things were finally company “vicariously liable” for the earlier following an investigation looking up. conduct of another employee who that turned up several instances of had created a fake blog in Morales’s alleged misconduct. “They’re con- Charney packed samples, ordered an name. Then the employee posted cerned that an unconventional leader Uber car to get to LAX, and boarded erotic photos of Morales on it. Char- somehow damages the company’s a red-eye for New York. After he landed, he put on a and tie and, ney told some board members and chances of success. But a contrarian, wearing white American Apparel his lawyers that he had photos of alternative-thinking CEO can bring and Common Projects sneak- Morales and of others accusing him creative ideas that advance the com- ers, sauntered into the office of the of harassment that showed the wom- pany, even the industry,” he says. company’s lawyers at 4 Times en weren’t victims. The board mem- “Oh wait, got to take this.” He hangs Square. bers and lawyers didn’t object to the up. Two days later we talk again. He idea of him using the photos as part doesn’t say it, but he’s already The shareholder meeting lasted of his defense. The photos were sent worked out a deal with Standard about an hour. Close to noon, the to several newspapers and websites. General, a hedge fund in New York, five board members entered the con- But no one imagined that someone which has been buying stock in ference room with Charney, their would put together a phony blog and American Apparel in hopes of influ- chairman, for their annual face-to- post the photos there. encing the fate of the troubled com- face meeting. Allan Mayer, a Holly- pany. wood public-relations man whom At the June 18 meeting, Charney Charney had put on the board in refused to accept either of the The conversation continues over the 2007, gave Charney an ultimatum: board’s choices. He argued that the next several days. He’s outraged, Resign voluntarily, give up the vot- business was doing well now, that crass, unapologetic, funny, disarm- ing rights to his 27 percent stake, and the supposedly new misconduct was ing, constantly jumping between receive a multimillion-dollar sever- conversations, and mostly off-the- really old misconduct, and in any record. “It’s my mother, let me take ance and a four-year consulting con- case it didn’t amount to enough to this, I apologize.” “It’s the finance tract. Otherwise, be fired for miscon- fire him. He noted that since he had guys, call me back in two minutes.” duct. Among the charges in the ter- renewed his employment contract in At one point, there are four people mination letter: Charney had the 2012, no new sexual-harassment cas- on a call. He puts us all on hold. Lat- company pay for a few plane tickets es had been filed against him. The er, it comes out that he’s given for his family; misused company board listened but was unmoved. An control of his stake money in other ways; and violated afternoon deadline was extended to in the company he founded—and, the company’s sexual-harassment early evening. Charney left the con- along with it, control of his future at policy. According to the letter, the American Apparel. We speak again. ference room several times to call his “Just a second, you might be two board “recently learned that you pre- lawyer, his parents, some colleagues. minutes on hold, just wait. … Excuse sented significant severance packag- Nine hours after the meeting began, me one second. … One second … oh es to numerous former employees to he told the board he wouldn’t resign. s- - -, one second, please.” ensure that your misconduct vis-à- They had a press release ready. It vis these employees would not sub- said Charney had been ousted as Just two weeks earlier, on June 17, ject you to personal liability.” chairman, suspended as chief execu- the eve of the company’s shareholder tive, and would be officially fired meeting, Charney, 45, was in a good The board also cited a case that had after a 30-day waiting period, as his mood for the first time in a while. received a lot of publicity and had contract required. Mayer and David For much of the past four years, he’d been resolved confidentially. In Danziger, a partner at MSCM, a To- tors on July 2. A week later, Stand- ard General and American Apparel reached a deal to bring in new board members, sort out and shore up the company’s finances, and keep the company’s downtown factory open. Charney will serve as a “strategic consultant” while the FTI investigation is under way. His role beyond that, if he has one, will de- pend on the results. “They control the shares. I’m a by- stander,” Charney says by phone in one of six conversations we have over two weeks. “My first issue is to save people’s jobs, put the company into a stable financial situation. And then we’ll evaluate whether or not I’ll be the janitor or the CEO or the consultant. … I believe Standard Charney at the company’s lawyers’ office in New York on June 18, soon after learning General will treat me fairly.” he was being dismissed. From the beginning, Charney called could force a sale, or additional law- himself a hustler. He left ronto accounting firm, became co- that could hold the company, chairmen. for high school in Connect- and the board, liable. “All along they icut, left to start a were thinking that anything goes in wholesale T- business in South After the board members left, a sec- Charneyville,” says Thomas White, a retary escorted Charney out of the Carolina, and left the South for Los professor of business ethics at Loyo- Angeles after his first company ran building. He walked to the company la Marymount University in Los An- into financial trouble. There he con- apartment on the southern edge of geles. “They only started to worry nected with the Korean community Hell’s Kitchen. The next day, Char- when they looked up and saw finan- that dominated the fast- busi- ney’s lawyer, Patricia Glaser, wrote cial disaster.” ness. American Apparel got off the to American Apparel’s lawyer, call- ground in 1998, and among its first After the meeting, the board author- ing the board’s behavior “not merely tag lines was: “Two Koreans and a ized FTI Consulting to begin a sec- unconscionable but illegal.” She said Jew making T-.” An ad features ond, more far-reaching investigation the allegations were baseless and a black-and-white drawing of Char- into Charney’s behavior. Charney involved “activities that occurred ney with a full head of hair and pro- stayed in New York, desperately tohipster . long ago (if at all) and about which looking for a way to reclaim his po- the Board and Company have had sition. At first it seemed as if he’d For five years, American Apparel knowledge for years.” found someone to back him. Stand- was a wholesale business. It, and he, The board had defended Charney ard General began acquiring Ameri- had already come to public attention, through years of negative publicity can Apparel shares, then lent Char- though. The New Yorker profiled and even worse financial problems. ney $20 million to buy them from Charney and his efforts to create per- Why now? “I know there’s a lot of the firm. He had to agree to pay 10 fect-fitting T-shirts; Charney took people who have criticized us very percent interest and use his stock as the reporter, Malcolm Gladwell, to a severely for not taking action earlier collateral. The board on June 28 be- strip club where the dancers modeled than we did,” says Mayer. “I get it. latedly adopted a poison-pill defense new styles. In late 2003, Charney But there’s nothing I would do dif- to prevent him from gaining control. opened his first store, on Sunset ferently. You don’t want to embark Boulevard in the then-seedy neigh- on a course of action that will bring By then, Charney owned 43 percent down the whole house. That’s de- of the company. Really, though, borhood of Echo Park. The clothes stroying the village to save it.” One Standard General controlled the would be logo-free and sweatshop- theory on the timing is that the com- shares, and the firm wasn’t neces- free; the advertising, sexually free, or pany had issued new shares in March sarily backing Charney. “This trans- at least that’s how he thought of it. to raise cash, reducing Charney’s action is not about the founder, nor is “He built an incredibly important stake from 43 percent to 27 percent. it an endorsement of him,” Standard brand,” says Ilse Metchek, president There could be other reasons: con- General said in a letter to its inves- of the Fashion Associa- cern about a possible bankruptcy that tion. “In terms of influence in the U.S., it’s as valuable as Gap.”

Today the American Apparel facto- ry—the largest garment manufactur- er in the country—is located in a seven-story, 800,000-square-foot, almost century-old, salmon-colored building. It has a banner proclaim- ing: “American Apparel is an Indus- trial Revolution.” Some 3,300 work- ers produce about a million pieces every week—T-shirts, , , , socks, and underwear in 31,000 styles, sizes, and colors. American Apparel has 249 stores in 20 countries; last year sales were $633 million, almost one-third of which came from wholesale. Its fac- tory workers make an average of $12 Charney at home in Los Angeles in 2004. an hour, generous by industry stand- ards. A company slogan printed on the cafeteria wall says: “We may not firm 42 West in L.A., where he’s a was the douche bag of the year. Eve- be politically correct—but we have principal partner, Mayer has a small ryone loved to hate American Appar- good ethics.” sculpture of a man on a horse with a el.” sword and a lance: a white knight. Marty Bailey, a taciturn Southerner By the middle of 2005, Charney, who worked for years at Fruit of the He’s had time to think about why then 36, had opened 53 stores in five Loom, is the head of . American Apparel has such an out- countries, which had sales of $250 An office near his used to belong to size reputation. “I think it’s the ten- million. He had 4,500 employees. He Charney. Guards showed up the day sion between the transgressive part was also facing two sexual- after Charney was fired and stood by of the brand and the idealistic part of harassment suits, which he said were his door for the next 48 hours, ac- the brand that gives it its special bogus. One case was dismissed in cording to four executives who were place in the culture,” Mayer says. “If arbitration. The other, brought by an not authorized to speak on the rec- you took out the sex, it would be ex-employee named Mary Nelson ord. The security code was changed, kind of boring. And if you took out who accused Charney of creating a and a camera was installed nearby. the idealistic component—our com- hostile work environment, made its John Luttrell, the chief financial of- mitment to the sweatshop-free, made way to court. Documents revealed ficer, became the interim CEO. The -in-USA philosophy—it would just that American Apparel had agreed to first few days he walked around the be sleazy. But you put them together, settle for $1.3 million without admit- floor with security guards of his and you have something that’s inter- ting liability. In exchange, the com- own. esting. It’s edgy, but it’s also pany could issue a press release say- strangely wholesome at the same ing an arbitration judge had dis- Bailey has been told by Mayer not to time.” missed the claims. The case eventu- discuss any of this. “This is our cor- ally ended up in confidential arbitra- porate floor,” he says, giving a tour Several months after the Echo Park tion. on June 30. “The, uh, CEO’s office store opened, Charney gave a now is here. The general counsel. Every- infamous interview with Claudine By 2006 the company had begun one else.” Bailey keeps walking. Ko, a reporter for Jane magazine, requiring employees to sign a docu- during which he masturbated, with ment acknowledging that American Mayer, the co-chairman, does the her consent, while carrying on a con- Apparel is a “sexually charged” talking for everyone. His specialty is versation about business. He en- workplace, hoping to protect itself crisis management, and his clients gaged in oral sex with an employee from what Charney and his lawyers have included the Los Angeles considered shakedowns. “One of the Dodgers and Universal Studios. He’s with Ko nearby, too. “It all started known Charney since 2004, when there,” says Roy Sebag, a managing things you learn when you do crisis the first story about the chief execu- partner at Essentia Equity who later management is that where there is tive who couldn’t keep his pants on invested in American Apparel and smoke, there isn’t always fire,” May- was published. In his office at PR still speaks with Charney. “Then he er says. If there’s one thing that everyone agrees on when it comes to Charney, it’s this: The guy works like crazy. One time, Charney took a deep inter- est in the lighting in the stores and studied bulb temperature and the Kelvin light scale. “The company is his whole life,” says Eric Beder, an analyst at Brean Capital. “He’s not into possessions or the money. I talk to CEOs who love their jobs but have a life. Not Dov.”

American Apparel went public in 2007, and Charney’s stake turned out to be worth $580 million. Afterward, Charney had to hire a real CFO, whom he later called “a complete loser” in a Wall Street Journal arti- cle. Charney apologized; the execu- tive left. With the cash infusion, American Apparel opened more than Charney at the factory in 2010. 100 stores in 2007 and 2008.

One of Charney’s confidants on the American Apparel, which boasted Charney moved into the facility in board was Robert Greene, author of about its immigrant workforce, went August. He had someone bring a the best-selling 48 Laws of Power, through an immigration audit in mattress and a hot plate; a shower which is about the art of manipula- 2009. It had to lay off more than half was installed. He slept with a walkie- tion. Charney hired him as a personal of its factory workers. Another thou- talkie on his chest and, depending on consultant, but Greene says the CEO sand quit for fear of being swept up who’s telling, at least one young didn’t follow all of his precepts. He in immigration raids. The disruption woman. Charney regarded his mov- was a volatile leader, says Greene. led to delayed shipments and an ex- ing into the distribution center as a “There’s nothing in my book really pensive hiring and training program. sign of his great commitment. The about that. It’s not about being cha- board saw it as a sign of Charney’s otic and yelling at people, which he The company lurched from crisis to insane management style. would do.” crisis. Sales slowed, the financial situation deteriorated, and each loan The problems at La Mirada cost the Charney describes himself as uncon- carried higher interest rates. At one company at least $15 million. A ventional, and some employees point, Charney personally guaran- $13.5 million interest payment— found the chaos and freedom in the teed the leases on some prime money American Apparel didn’t workplace thrilling. Charney often space for stores. Investors and their have—was due in April. invited new executives and visiting chosen executives came and went. employees to stay with him for a few Charney would welcome them en- This February, Greene and Mayer weeks, sometimes to get a feel for thusiastically, then quickly come to took Charney out to dinner at a company culture. That included the conclusion they didn’t fit in. steakhouse in Los Angeles’s Korea- holding weekly videoconference He’d make it impossible for them to town. They spoke to him about calls with managers from home, stay, according to five executives bringing in some senior executives. sometimes in bed, occasionally shirt- familiar with Charney’s management Charney was the CEO and the presi- less. He put his mobile phone num- style. dent. There was no chief operating ber on the company’s website and officer, no chief technology officer. would answer no matter who called. Then, in 2013, the company built an The company never had official de- Young women regularly sent him automated distribution center outside signers. The two weren’t trying to nude photos. “Dov is very intense. Los Angeles in La Mirada that was ease him out, only trying to free Dov He’s very charismatic. And anybody supposed to save $5 million a year. to be Dov. Charney seemed to like who is so passionate and so totally But delays, software problems, and that idea. There was another possi- devoted to what he’s doing can be insufficient training hampered opera- bility: selling the company. People attractive. So he’s always been sub- tions; some orders were comically familiar with American Apparel say jected to a lot of temptation,” says confused. One customer received a Luttrell, the CFO, favored that, Mayer. box with nothing but packing tape. though he said the opposite publicly. Charney wouldn’t even discuss it. That case could bring other compli- could conclude by early August. cations. Heimanson asked a Los An- Standard General has said the board Once again, pressing financial mat- geles court to try the case rather than it wants to install will determine ters arose. Charney agreed to let the send it to confidential arbitration, as Charney’s fate once it’s seen the company sell more shares, diluting his stake, in the belief the company American Apparel requires in all conclusions. “I’m reminded of that would grant him additional shares such matters. The judge ruled that quote from Nietzsche,” says Mayer. later. It was difficult to sell the stock, the documents all American Apparel “ ‘The consequences of our actions says Beder, whose firm helped man- employees have to sign are take hold of us, quite indifferent to age the offering. “Part of that is be- “unconscionable,” according to legal our claim that meanwhile we may cause of Dov.” Charney now had a filings. The agreements forbid work- have “improved.” ’ That may well be 27 percent stake, and for the first ers from filing claims against the Dov’s epitaph.” time since the company went public, company, talking about the compa- he was vulnerable. But he didn’t ny, or sharing any information about seem to know it. On July 9, Standard General an- the personal life of the CEO. If they nounced its deal with American Ap- do, they risk being sued for $1 mil- All spring, Charney concerned him- parel. It will provide as much as $25 lion. The company is appealing the self with rooting out inefficiencies. million to the company and will cre- ruling. If it stands, “we’ll be able to For a while he was reviewing almost ate a seven-member board that will every check American Apparel is- shine sunlight on the backroom deal- include experienced retailers and sued. That wasn’t making Luttrell ings of American Apparel and Dov turnaround and corporate governance too happy. In May, Charney forced Charney,” says Heimanson. out his general counsel, Glenn Wein- experts. Standard General will keep man. Charney said it was because one seat for itself, says David Weinman cost too much. Weinman Charney’s termination letter also Glazek, a partner at the firm. Mayer declined to comment on the matter. faults him for alleged financial mis- and Danziger will keep their seats, conduct. “You authorized payments too. The new board, in turn, may Soon the board received unpleasant to induce employees to sign release bring in outside help to run the com- news about two lawsuits—a poten- agreements that were aimed at pro- pany. “We look for good businesses tial payment of $700,000 to settle tecting you from personal liability with bad balance sheets that can be with Morales and new information in for your misconduct,” the letter says. fixed,” says Glazek. “Chaos has a a suit accusing Charney of assault. In Two former company executives say cost. We want to institutionalize November 2012, Michael Bumblis, a that was American Apparel’s out-in- things.” store manager in Malibu, had ac- the-open, frequently used legal strat- cused Charney of rubbing dirt in his egy. Employees had to re-sign their Glazek says Standard General wants face because Charney was displeased arbitration and confidentiality agree- to keep the company’s business with the store’s condition and perfor- ments when they got raises; if they model, too. But it’s made no com- mance. Bumblis’s lawyer, Ilan left the company, they received sev- mitment to the company’s founder. Heimanson, says he informed the erance in exchange for promising not “Dov found a lifeboat, but he’s still company of evidence of the confron- to sue or disparage American Appar- surrounded by sharks,” says Lloyd tation beyond the accounts of wit- el. Everybody knew this, and every- Greif, an investment banker in Los nesses. The stores had security cam- one signed, they say (including these Angeles. Meanwhile, Charney can’t eras, and Bumblis had access to the two executives). video. Among the details in the com- help himself: In recent days, he was plaint was a phone call Charney had spotted at an American Apparel store supposedly made to Bumblis about The board also mentions some unau- in . his store’s poor sales. “Get your f- - - thorized expenses for employees and ing s- - - together, fag. Where is your f family members. Nickel-and-dime - - -ing creativity? Get some f- - -ing stuff, say three people with girls in to stand on PCH knowledge of Charney’s spending. [Pacific Coast Highway] and have Charney behaved as if American them wave a f- - -ing American flag. Apparel was still his company and Are you a fag? Do you not want to didn’t always distinguish between see girls in bikinis? Are you banging the personal and the professional. that girl you were with in Vegas? The amounts they’re aware of aren’t What’s her name?” American Ap- enough to be fired over, they say. parel’s lawyer said in a filing that Bumblis was a poor-performing em- FTI Consulting’s probe into Char- ployee who was dismissed and that ney’s conduct began on June 19 and his story is “entirely contrived or wildly exaggerated.”