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American Apparel's Bankruptcy Leaves Dov Charney Broke

Not long ago, he was the biggest shareholder, worth tens of millions of dollars. Soon, he's likely to have nothing.

Posted on October 6, 2015, at 1:04 p.m. ET

American Apparel / Via americanapparel.net

Five years ago, Dov Charney was worth almost $70 million and ran one the country's hottest businesses as its largest shareholder. Today, his shares in American Apparel have been wiped out, he's banned any role at the company and he owes millions to the hedge fund that now controls the business he founded.

And if the company's bankruptcy plan is approved, its new owners will be essentially banned from transferring shares to Charney, his family members or anyone else affiliated with him.

The bankruptcy filing is "a huge step forward for American Apparel," CEO Paula Schneider said in a letter to employees, comparing it to previous bankruptcies at Bloomingdale's, American Airlines and Marvel Comics. "The process begins a new day at American Apparel and lays the foundation for a hopeful future."

Here's what it took to get to this "huge step forward."

Charney was served with a surprise termination letter in June 2014, alleging he misused corporate assets, violated sexual harassment policies and more.

Bloomberg / Via Bloomberg

He was given an ultimatum: be fired for misconduct, or resign and give up the voting rights to his 27% stake in the company, Bloomberg Businessweek reported. The second option came with a multimillion-dollar severance and four-year consulting contract.

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Charney, scrambling to stay in charge, teamed up with hedge fund Standard General, which gave him a loan of nearly $20 million at a 10% interest rate to buy American Apparel shares.

This way, he boosted his stake to 43%. But as part of the deal, Standard General gained control of the voting rights of those shares.

American Apparel / Via americanapparel.net

But this caused issues. Standard General quickly reached a deal with American Apparel and Charney to replace most of its board and lend the company up to $25 million. At that time, in July, the stock was trading at about 85 cents a share.

Standard General, in a complaint against Charney in July, said "the deal allowed Charney to reestablish a significant ownership stake in American Apparel stock and the potential to realize value should the turnaround succeed."

American Apparel / Via americanapparel.net
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For the rest of the year, Charney worked as a consultant during an investigation into the allegations against him. He claims Standard General promised to reinstall him, which the hedge fund disputes. He was officially fired in December.

But he remained the biggest shareholder. In December, Charney made headlines for saying he was down to his last $100,000 and sleeping on a friend's couch. He was either unwilling or unable to sell his 75 million shares at that point.

American Apparel / Via americanapparel.net

Standard General, without owning any American Apparel stock, oversaw the installation of a new board, finance chief, general counsel and other senior managers as part of a much-touted attempted turnaround.

The company said it planned to “recast the brand in a positive, inclusive, socially conscious light," in a presentation filed with the SEC. "The millennial spirit is not about age but about involvement, individuality and self-expression."
American Apparel / Via americanapparel.net

The company said it planned to “recast the brand in a positive, inclusive, socially conscious light," in a presentation filed with the SEC. "The millennial spirit is not about age but about involvement, individuality and self-expression."

American Apparel's attempts to rebrand and restructure haven't been successful. This year, sales crashed, its net loss widened and the stock kept tumbling. Charney's stake, worth around $86 million in December, shrank to just under $9 million on Friday.

Google / Via google.com
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The company said this summer that it has been fending off about 20 lawsuits and administrative actions out of Charney and his associates. It has also been dealing with protests out of its manufacturing workforce in Los Angeles.

Under the proposed bankruptcy plan, American Apparel bondholders including Standard General, Monarch Alternative Capital, Coliseum Capital and Goldman Sachs Asset Management, will convert $200 million of debt into ownership of American Apparel.

Shareholders, including current and former employees who owned the company's stock, will be completely wiped out.
American Apparel / Via americanapparel.net

Shareholders, including current and former employees who owned the company's stock, will be completely wiped out.

The company said any store closures "will be conducted in an orderly fashion and over an extended period of time." Jobs will remain in the U.S. and operations will continue without interruption.

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Standard General, by teaming up with the other bondholders, is stepping back from American Apparel after the disastrous past year. As of Oct. 1 it's still in litigation with Charney in Delaware – it filed its complaint against him in July.

While Charney took a five-year loan from Standard General, he pledged his stock as collateral. Standard General has been trying to collect on that.

Spencer Platt / Getty Images

It's not clear where the lawsuit with Charney will go or how much he now owes the hedge fund. Standard General's spokesperson didn't return emails seeking comment, while Charney declined to comment, citing ongoing litigation.

Standard General tops the list of American Apparel's unsecured creditors in court filings. Those show that Standard General LP and the Standard General Master Fund LP are owed about $25 million, together.

The company says the restructuring will take about six months.

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