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American Apparel founder Dov Charney threatens to sue over ousting

American Apparel's board rejected a demand to meet and reinstate ousted CEO Dov Charney, according to someone close to the matter. American Apparel last week stripped Charney of his titles of chief executive, chairman and president.

Gary Friedman/Los Angeles Times/AP/File
Dov Charney, founder of American Apparel, is photographed at the company's factory in downtown Los Angeles in 2012. The company's board has refused to meet with Charney, who has threatened legal action if he is not reinstated as CEO.

The independent directors of maverick retailer American Apparel Inc have rejected a demand to meet and reinstate ousted CEO Dov Charney on Monday, a source close to the matter said.

The board last week stripped Charney of his titles of chief executive, chairman and president. Initially known for insisting on manufacturing clothing in the United States, Charney eventually became notorious for conduct like attending meetings in his underwear.

American Apparel's board cited Charney's alleged misuse of company funds and role in disseminating nude photos of an ex-employee who had sued him.

Charney's lawyer demanded a meeting on Monday, and the board's refusal to meet with and reinstate him makes a legal battle with the ex-CEO, who still controls 27 percent of the company's stock, more likely.

In the letter to the board, sent on Thursday, lawyer Patricia Glaser said the company had failed to give Charney 21 days' notice of his severance package as required by law, making his dismissal "not only unconscionable but illegal."

A link to the letter, whose receipt the source familiar with the matter confirmed, was provided in an article on the Wall Street Journal's website.

The letter threatened legal action should 45-year-old Charney not regain his executive positions.

The board sees no point in meeting with Charney at this time, the person close to the matter said.

The board is expected to announce it is working with investment boutique Peter J. Solomon imminently, the source said. An officer at the bank declined to comment.

It remains unclear what role the boutique advisory firm would perform for the retailer, which has a market value of $120 million and has been struggling with weak sales and heavy debt. It could provide financing alternatives, the source said.

The source denied an accusation by Glaser that the board gave Charney an ultimatum on Wednesday: resign voluntarily to receive $1 million a year over four years as a consultant, or be terminated for cause.

Charney's ouster takes effect on July 18. Before that time, the board would not rule out an agreement with Charney should he promise not to challenge the board's leadership, the source close to the matter said.

The New York Post reported on Sunday that Charney has decided to pursue a lawsuit alleging wrongful dismissal in the coming days.

The management shakeup followed years of company stagnation, as the company amassed more than $250 million in debt. Charney also faced public scrutiny during a string of sexual harassment allegations. Charney's lawyer at the time dismissed the claims, which ultimately proceeded to arbitration.

The company's second largest shareholder, FiveT Capital AG, has withdrawn its support of Charney, making a coalition of investors opposing the CEO's removal unlikely, Bloomberg reported.

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