The Washington PostDemocracy Dies in Darkness

So many sex, financial allegations involving American Apparel’s Dov Charney that company couldn’t afford the insurance

Details have emerged that paint a much clearer picture of exactly why the board of American Apparel voted to fire its founder, president and chief executive, Dov Charney. It wasn’t just that his many alleged work-related sexual transgressions were distasteful, to put it mildy. The big problem was the mounting expenses that stemmed from them were a huge financial albatross.

Here’s how the board described the situation in its termination letter to Charney, obtained by Buzzfeed:

The Company’s employment practices liability insurance retention has grown to $1 million from $350,000, causing an unacceptable level of risk for the Company, and the premiums for this insurance are well outside of industry standards. These risks and costs to the Company are a direct result of your actions. The resources American Apparel had to dedicate to defend the numerous lawsuits resulting from your conduct, and the loss of critical, qualified Company employees as a result of your misconduct are also costs that cannot be overlooked.

No wonder the company’s stock price rose nearly 20 percent after news broke that Charney had been fired Wednesday; Charney’s cost of employment was quickly becoming untenable.

The board apparently offered Charney a choice: Resign as president and chief executive and take a job as a consultant with a yearly salary of $1 million for four years, then walk away with a hefty severance package — or be fired. The board informed Charney of his options at noon during the company’s annual meeting and gave him until 9 p.m. to decide. In the termination letter to Charney, the board detailed the myriad ways keeping Charney employed was costing it money (Charney and his lawyers have repeatedly denied wrongdoing and described the company’s charges as “baseless”):

  • Allowing an employee to set up something akin to a revenge porn blog

In 2011, former American Apparel employee Irene Morales filed a $260 million lawsuit against Charney alleging the CEO had made her his “sex slave” not long after her 18th birthday. The case was eventually sent to arbitration because Morales allegedly sent nude photos of herself to Charney after she left the company. Charney knew about and did nothing to stop an American Apparel employee from creating a blog posing as Morales and posting the nude photos she allegedly sent. “You were in a position to prevent this conduct from occurring but, since it benefited you personally, you allowed it to continue,” the board stated in Charney’s termination letter. “Your failure to act was not in the best interest of the Company. It exposed the Company to liability and at least in once instance, directly resulted in an arbitrator finding that the Company acted with malice.”

  • Using company money as a personal ATM to issue payments to former female employees in exchange for their silence

The company is accusing Charney of issuing severance, bonus and commission payments as well as salary increases in exchange for protection from legal action from American Apparel staff. The money came with signed release agreements that were legally binding. Said the board:

None of these severance packages were discussed with or approved by the Board of Directors. These severance packages were material expenditures of Company funds that were not in the best interests of the Company and instead were to protect you from personal liability for misconduct.
Moreover, we were recently apprised that you engaged in misconduct – including the potential subordination of perjury – in a pending litigation matter and that your misconduct will undermine the Company’s position in that case. [Presumably the letter-writer meant ‘subornation’ of perjury, meaning inducing someone to lie under oath.]
  • Charney’s repeated engagement in sexual harassment

Not only did the board say that Charney’s behavior left him open to sexual harassment lawsuits, it also claims that he flouted the company’s anti-discrimination policy as well. “Furthermore, on several occasions you have made derogatory and disparaging remarks directed at persons of certain ethnicities or related to their gender, sexual orientation or religious persuasions that are discriminatory and offensive and are not in accordance with Company policies,” the board said. It also alleges that Charney refused to participate in mandatory sexual harassment training and that he didn’t think much of his employees’ participation, either.

  • Using company assets for his own personal whims

The board alleges that Charney used the company’s corporate apartments for non-business purposes — staying in them himself or allowing his friends to do the same — and booked flights for his parents with company money. According to a report by Reuters: “Charney believed any use of apartments was not material and was normal business practice. In terms of the travel charges, this person said Charney’s father is on American Apparel’s payroll and that his mother, although not an employee, is a retail and design contributor to the company.” The company asserted Charney’s reputation also made it more difficult to obtain financing without high double-digit interest rates, and that companies refused to work with American Apparel as long as Charney was installed there.

Charney is fighting the termination and maintains through his lawyer, Patricia Glaser, that he was fired illegally. Charney owns a 27 percent share in the company.

“We’re very confident that we are on very firm legal ground,” company board co-chairman Allan Mayer told the Los Angeles Times. “It’s what we would expect from Dov’s attorney in a situation like this, but we continue to believe firmly that we did the right thing, for the right reasons, in the right way.”

One obvious question remains: Why did the company allow Charney to rack up a list of alleged offenses as long as Rapunzel’s ponytail before it finally decided to kick him out?

In a letter to the board, Glaser wrote, “No one ever spoke with Mr. Charney about the issues identified in the letter, even though he is the person with the most direct knowledge of what actually happened. More fundamentally, the charges that are leveled against Mr. Charney in the Notice are completely baseless. Most involve activities that occurred long ago (if at all) and about which the Board and the Company have had knowledge for years. None of Mr. Charney’s alleged actions caused injury to the financial condition or business reputation of the Company, and none even comes close to constituting good ’cause’ for Mr. Charney’s termination under the Employment Agreement. It is the Board’s actions, not Mr. Charney’s, that have harmed the Company.”