SEC Begins Formal Investigation into Ex-CEO Dov Charney

In Reports, What's New, Industry News by Jeff Prine

American Apparel's CEO Dov Charney

American Apparel’s controversial former CEO Dov Charney

Los Angeles–The Securities and Exchange Commission (SEC) has launched a formal investigation into the conduct of Dov Charney, founder and ousted CEO of American Apparel.

The Made in USA retailer revealed this week that the SEC is investigating  “matters arising from the Suitability Committee’s review relating to Mr. Charney,” adding that they intend to cooperate fully in the “non-public, fact-finding inquiry.”

The retailer’s board of directors removed Charney as CEO in June, alleging a handful of “violations including sexual harassment claims and misuse of corporate funds.”

That was after an investigation of Charney that apparently cost the cash-strapped chain just under $10.4 million in legal fees and other expenses, according to this week’s annual report.

Charney was officially fired from American Apparel in December. His attorney called the American Apparel investigation  “a complete sham,” American Apparel’s termination decision “groundless” and sexual harassment allegations against Charney “baseless.”

Charney had no comment on news of the SEC probe, but reiterated that December statement. “It still applies,” he said.

Meanwhile new CEO Paula Schneider has a difficult turnaround ahead of her. In its annual report filed on Wednesday, American Apparel posted a fourth quarter loss of $28 million, up from $20.8 million in fourth quarter 2013. Net revenue was down 9.2% to  $153.5 million, from $169.1 million in the same period a year earlier.

Besides her turnaround task, Schneider and other new executives have faced an internal insurgency that has included an anonymous email campaign criticizing new management, workers charging unfair practices by management and an online repository of support for Charney called #TeamDov. Schneider sent a memo to staff in February asking them “not to be influenced by unfounded personal attacks.”

Charney, in fact, remains a virtual ghost executive. He retains his 27% share in American Apparel but ceded voting power to the hedge fund Standard General last year. Standard General now controls the board as part of its deal to help American Apparel. In this week’s report, American Apparel announced it had secured a $15 million loan from Standard General to help with cash flow.

Also in its annual report: American Apparel disclosed that “recently…received correspondence indicating that Charney intends to reinstate his demand for arbitration.”

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