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Shareholders' Group Sues American Apparel As Hipster Clothing Company's Financial Woes Mount

A group of shareholders filed suit against American Apparel CEO Dov Charney and seven of the hipster clothing companies directors for allegedly mismanaging the company and damaging its image as its shares have dropped more than 80 percent in the last few years and the downtown L.A. concern has failed to file required second-quarter financial data with the U.S. Securities and Exchange Commission.

The suit seeks restitution, damages, reforms and the ability for stockholders to elect three board members. According to Courthouse News Service:

The shareholders' derivative complaint claims that Charney and his board of directors misled investors, mismanaged the company and "irreparably damaged" its image.

... Shareholders say the share price has crashed from a high of $16.80 in December 2007 to $1.03, "because the company has had to disclose - not once, but twice - that its independent accounting auditors have found material weaknesses in its financial controls."

Additionally, American Apparel had to lay off about 1,800 employees last year after it couldn't verify their immigration status. The incident, the suit claims, damaged the company's efficiency and "Made in the USA" marketing image.

Earlier this week we reported that a group of long-term investors was investigating the company for "possible breaches of fiduciary duty ... "

This week American Apparel released preliminary second-quarter numbers that show that the company was operating under a cloud of about $120 million in red ink.

As far as missing its SEC filing, which ultimately could lead to it being delisted by the New York Stock Exchange (a move that some have observed is often a prelude to bankruptcy), the company had this to say in a statement released this week:

The Company intends to file the Form 10-Q for the second quarter of 2010 as soon as practicable, currently expected by no later than September 15, 2010. No assurances can be given as to when the Form 10-Q will ultimately be filed, or that the financial statements contained therein ...

Doesn't sound optimistic to us.


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