Dov Charney’s days at American Apparel ‘over’

The future of Dov Charney, the colourful and controversial Canadian founder of hipster clothing line American Apparel, hangs by a thread after the company admitted this week it is close to bankruptcy. Charney faces losing his clothing empire amid plummeting stocks, rumoured store closures and a federal investigation.

To add to his woes, the 41-year-old chief executive, who owns 53 per cent of American Apparel, is also being sued by angry shareholders. They say Charney and his board of directors misled investors, mismanaged the company and "irreparably damaged" its image.

Founded in downtown LA in 1989, American Apparel has grown into a worldwide empire, employing 10,000 staff globally and with 285 retail stores in 20 countries, including 15 in Britain. It is known for its colourful basics, ultra-fashionable lines of spandex leggings and leotards and raunchy advertising campaigns.

Yet this week the company was forced to admit that it is close to running out of cash and may not be able to continue. American Apparel is expecting to make a big loss for the first half of 2010, yet it is also in debt to the tune of $120.3 million. As a result it warned that it "may not have sufficient liquidity necessary to sustain operations for the next 12 months".

American Apparel also faces a federal investigation after it switched auditors last month. The US Attorney's office is looking into why American Apparel rehired its previous accounting firm, Marcum, after its current auditors Deloitte & Touche resigned last month. American Apparel has admitted that Deloitte had raised concerns about "material weaknesses in its financial controls".

These holes in its accounting practices are one of the main reasons Charney is being sued by his shareholders. In a complaint filed yesterday, shareholders say these financial issues led to the company's share price falling by more than 90 per cent in less than three years. Stocks fell from a high of $16.80 in December 2007 to $1.03 on Tuesday. The company is now on the verge of being de-listed from the New York Stock Exchange.

The complaint argues that "other problems" also contributed to American Apparel's rapid demise. Last year the company was forced to lay off as many as 1,800 immigrant workers who had invalid or suspect papers - one third of its manufacturing workforce. This "seriously damaged American Apparel's manufacturing efficiency", complainants said.

Charney has refused to comment publicly on the company's situation. Yet one retail consultant told the Los Angeles Times that American Apparel is operating like "a madhouse". Howard Davidowitz, chairman of national retail consulting and investment banking firm Davidowitz & Associates Inc, told the newspaper that Charney's time at the helm of his company was finished. "No one's going to leave him in control - that's over with. I think it's impossible to get anybody who's going to bet on him again." ·