Case 2:10-cv-06352-MMM-JCG Document 144 Filed 02/15/13 Page 1 of 134 Page ID #:2751 ri 1 KESSLER TOPAZ MELTZER & CHECK, LLP 2 Ramzi Abadou (222567) [4'] [email protected] gCT C 3 Eli R. Greenstein (217945) egreensteincktrnc. corn 4 Stacey M.raplan(241989) r:c.1 5 2013 skap1anktme, corn 5 Erik D. Peterson (257098) çpetersonktrnc,com 6 One Sansorne Street, Suite 1 850 San Francisco, CA 94104 7 Telephone: (415) 400-3000 Facsimile: (415) 400-3001 8 Lead Counselfor Lead Plaint iJJ and the Class 9 UNITED STATES DISTRICT COURT 10 CENTRAL DISTRICT OF CALIFORNIA 11 WESTERN DIVISION 12 IN RE AMERICAN APPAREL, Case No. CV-10-6352 MMM (JCG) 13 INC. SHAREHOLDER (Consolidated) LITIGATION 14 SECOND AMENDED CLASS 15 ACTION COMPLAINT FOR VIOLATION OF FEDERAL 16 SECURITIES LAWS 17 This Document Relates To: JURY TRIAL DEMANDED 18 ALL ACTIONS, 19 20 21 22 23 24 25 26 27 28 Case 2:10-cv-06352-MMM-JCG Document 144 Filed 02/15/13 Page 2 of 134 Page ID #:2752 1 TABLE OF CONTENTS 2 I. INTRODUCTION........................................................................................... 1 3 II. SUMMARY OF THE ACTION ..................................................................... 2 4 A. American Apparel’s Business Model and Brand .................................. 2 5 B. Class Period Allegations ....................................................................... 5 1. Defendants’ Immigration Compliance Misrepresentations ........ 5 6 2. Defendants Misleadingly Downplay the Negative Effects 7 of the Terminations on the Company’s Operations .................. 10 8 3. Defendants Disclose the Severe Disruptions Caused by the 9 Manufacturing Workforce Terminations .................................. 13 10 4. Defendants’ Misleading Statements Regarding American Apparel’s Unorthodox Business Practices ............................... 14 11 a. Deloitte Resigns and the DOJ Commences a 12 Criminal Investigation....................................................16 13 b. Deloitte Publicly Accuses Defendants of Committing Fraud .......................................................... 17 14 C. Post-Class Period Events .................................................................... 19 15 III JURISDICTION AND VENUE ................................................................... 21 16 IV THEPARTIES .............................................................................................. 22 17 A. Lead Plaintiff....................................................................................... 22 18 B. Corporate Defendant...........................................................................22 19 C. Individual Defendants.........................................................................22 20 D. Lion Capital ......................................................................................... 27 21 V CONFIDENTIAL WITNESSES................................................................... 27 22 A. Confidential Witness 1........................................................................27 23 B. Confidential Witness 2........................................................................28 24 C. Confidential Witness 3 ....................................................................... 31 25 D. Confidential Witness 4........................................................................32 E. Confidential Witness 5........................................................................32 26 F. Confidential Witness 6........................................................................33 27 G. Confidential Witness 7........................................................................33 28 -i- Case 2:10-cv-06352-MMM-JCG Document 144 Filed 02/15/13 Page 3 of 134 Page ID #:2753 1 H. Confidential Witness 8........................................................................34 I. Confidential Witness 9........................................................................35 2 J. Confidential Witness 10......................................................................37 3 K. Confidential Witness 11......................................................................39 4 L. Confidential Witness 12......................................................................40 5 M Confidential Witness 13......................................................................41 6 N. Confidential Witness 14......................................................................42 7 O. Confidential Witness 15......................................................................42 8 VI. BACKGROUND TO THE CLASS PERIOD............................................... 43 9 A. The Individual Defendants Take American Apparel Public ............... 43 10 B. U.S. Immigration Law Employment Requirements ........................... 45 11 C. Defendants Surreptitiously Prepare for the I-9 Audit ......................... 47 12 D. American Apparel Is Served with the Inspection Notice ................... 48 13 VII. EXCHANGE ACT VIOLATIONS...............................................................52 A. Defendants Conceal the Inspection Notice While Simultaneously 14 Assuring Investors that Its Workers Are Documented ....................... 52 15 B. Defendants Partially Reveal American Apparel’s Massive 16 Undocumented Workforce..................................................................55 17 C. Defendants Make False and Misleading Statements and Omissions About the Effects of the Terminations..............................58 18 D. Defendants Knowingly Misled Investors About the Negative 19 Effects of the Terminations.................................................................62 20 1. Defendants Knew that Their Vertically-Integrated Operations Had Been Severely Disrupted by the 21 Terminations.............................................................................62 22 2. Defendants Knew that American Apparel Lacked Proper 23 Inventory Following the Terminations ..................................... 64 24 3. Defendants Knew, or Were Reckless in Not Knowing, that the Large Turnover in American Apparel’s Manufacturing 25 Workforce Had Harmed the Company’s Operations and 26 FutureProspects........................................................................ 67 27 28 -ii- Case 2:10-cv-06352-MMM-JCG Document 144 Filed 02/15/13 Page 4 of 134 Page ID #:2754 1 4. Defendants Had Access to Information Showing the Terminations’ Negative Effects on the Company’s 2 Operations and Future Prospects .............................................. 70 3 5. Defendants Suddenly Stop Reporting Their Monthly Sales 4 Figuresin 4Q09 ........................................................................ 74 E. Defendants Partially Disclose the Effects of the Terminations .......... 76 5 F. Lion Capital and American Apparel Become Business Partners ....... 79 6 G. Defendants Engage in Undisclosed Reckless Business Practices ...... 86 7 1. Defendants Conceal American Apparel’s Debt Covenant 8 Breach....................................................................................... 89 9 2. Defendants Withhold American Apparel’s Negative Financial Results and Projections from Deloitte in 1Q10 ........ 99 10 3. Deloitte Accuses the Individual Defendants of Fraud ............ 104 11 VIII. LOSS CAUSATION ................................................................................... 106 12 IX. PLAINTIFF’S CLASS ACTION ALLEGATIONS...................................110 13 X. NO SAFE HARBOR ................................................................................... 113 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -iii- Case 2:10-cv-06352-MMM-JCG Document 144 Filed 02/15/13 Page 5 of 134 Page ID #:2755 1 I. 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; (iii) documents obtained via a Freedom of Information Act 9 (“FOIA”) request to U.S. Immigration Customs and Enforcement (“ICE”); and (iv) 10 securities analysts’ and news reports about the Company. Lead Plaintiff believes 11 that substantial additional evidentiary support will exist for the allegations set forth 12 herein after a reasonable opportunity for discovery. 13 2. This is a putative class action for violation of the federal securities 14 laws brought under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the 15 “Exchange Act”), and Rule 10b-5 promulgated thereunder by the SEC. Lead 16 Plaintiff’s claims are brought on behalf of all persons who purchased or otherwise 17 acquired American Apparel common stock between November 28, 2007 and 18 August 17, 2010, inclusive (the “Class Period”), to recover damages caused by 19 Defendants’ violations of the securities laws as alleged herein. 20 3. Defendants are: (i) American Apparel; (ii) the Company’s Chief 21 Executive Officer (“CEO”), President and Chairman of the Board of Directors 22 (“Chairman”), Dov Charney (“Charney”); (iii) the Company’s Director of 23 Corporate Finance and Development, Executive Vice President and Chief 24 Financial Officer (“CFO”), Adrian Kowalewski (“Kowalewski”) (collectively, 25 “Defendants”); 1 and (iv) Lion Capital LLP, a private