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 #:2099 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. 1 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 3 of 99 Page ID #:2100 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 2 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 4 of 99 Page ID #:2101 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. 3 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 5 of 99 Page ID #:2102 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 -Jru 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 Page 6 of 99 Page ID #:2103 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.