Don Charney’s Sleazy Struggle for Control of American Apparel By Susan Berfield When I first reach Dov Charney 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 suit 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 socks 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 Standard General 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 Los Angeles 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 Yiddish hustler. He left ronto accounting firm, became co- suits that could hold the company, chairmen. Montreal for high school in Connect- and the board, liable. “All along they icut, left Tufts University to start a were thinking that anything goes in wholesale T-shirt 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-fashion 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-shirts.” 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 glasses. 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.