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American Apparel Fight Takes A Twist As Charney Cedes Power To Hedge Fund

It doesn't look as though Charney will be returning as the CEO of American Apparel any time soon, but he's found a way to get some of what he wants.

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American Apparel's suspended chief executive officer and founder Dov Charney has built up a 43% stake in the retailer since his ouster last month — but he's relinquished that voting power to the hedge fund that helped him buy those shares last week.

Charney, who was previously rallying shareholder support to ultimately reinstall himself as CEO, has given control of his stake to hedge fund Standard General to negotiate directly with American Apparel's board, The New York Times reported Wednesday night. The firm is in talks with the board, which booted Charney for cause on June 18, on a long list of alleged misdeeds, to bring in new leadership, including new and experienced directors, as per the report. A person familiar with the situation confirmed the contents of the Times report.

Since American Apparel's board gave Charney his surprise letter of termination last month, a lot of drama has unfolded between the two parties. Charney boosted his 27% stake (which had been diluted after a capital raise this spring) to 43% with the help of a loan from Standard General. With a majority, he could add new directors to the seven-person board, perhaps helping him win back his CEO position. He also called for a special shareholders meeting in September, citing his power as CEO. The board rejected his request, noting his suspension. Most significantly, American Apparel's board implemented an anti-takeover defense known as a poison pill, which would essentially dilute all shareholders' stakes if Charney were to purchase more stock, thus preventing him from reaching 51%.

Up until now, Charney's only real option in the board's eyes was for the executive to conduct what's known as a public consent solicitation — asking other shareholders to agree to a meeting in September, nominating new directors, getting them elected, then presumably attempting to get back in as CEO. That would be expensive and could take a year or more. Further, the board hired FTI Consulting to do a forensic investigation into Charney, talking to employees and searching for evidence of wrongdoing that hasn't yet been uncovered, to further impede his return, said the person familiar with the matter, who declined to be identified citing lack of authorization to speak publicly.

This person said the board could have a preliminary report from FTI in the next week. It's possible the investigation will reveal nothing, but if there's evidence of securities fraud — something that another source close to the Charney family has hinted may be an issue — then Charney may be legally barred from ever serving as a CEO or director anywhere, the person said. Lion Capital, a longtime lender to American Apparel, has reportedly asked to see any related evidence, even though the firm continues to stand by Charney. American Apparel owes $10 million to Lion, and has the funds to pay that, but the board has been negotiating with the firm to potentially pay them more in order to eliminate Lion's right to two board seats, the person said.

That's what makes the entry of Standard General a bit of a wildcard. The hedge fund, which hasn't promised any future role for Charney at the company, told the Times that he agreed to refrain from obtaining a seat on a new board if that can successfully be created. Charney's incentive in the situation was to ensure certain parts of American Apparel's business model would remain intact, such as its "Made in the USA" ethos and payment of fair wages for employees.

"I handed over my ownership control to Standard General so they could protect the company and all of its stakeholders, particularly the employees," Charney told the Times. "The least important thing was me. I know that will be dealt with fairly later."

Charney, who founded American Apparel in 1998, was stripped of his chairman title and fired as CEO last month. The termination will be effective after a 30-day period later this month. The executive has long been dogged by tales of sexual misconduct. The board, in its firing letter last month, said Charney sexually harassed employees and "refused to participate in mandatory sexual harassment training"; gave "significant" severance packages to former employees to help conceal wrongdoing; was "aware of, but took no steps to prevent an employee under (his) direct supervision and control from creating and maintaining false, defamatory and impersonating blog posts about former American Apparel employees." He also authorized salary increases and bonuses for employees to get them to sign releases aimed at protecting him from personal liability, and sought company reimbursement for "personal services such as legal consultation," according to the letter.

If you have more information about American Apparel, please contact Sapna Maheshwari at or call 917-727-0213.

Sapna Maheshwari is a business reporter for BuzzFeed News and is based in New York. Maheshwari reports on retail and e-commerce.

Contact Sapna Maheshwari at

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