American Apparel Faces Shareholder Suits

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By Tanya Roth, Esq. on August 30, 2010 7:04 AM

American Apparel is struggling hard. The company is facing three shareholder suits, a complaint from the NYSE and immigration issues. How did a once successful company come to such a sorry state of affairs? Only CEO Dov Charney and the leaders of American Apparel know for sure and even that assumption might be in doubt.

Almost every area of American Apparel's business is under attack. According to BusinessWeek, the company is attempting to bring itself under compliance with a New York Stock Exchange letter telling the company it faces being de-listed if it does not file its second-quarter results in a timely fashion. During the week of August 16, American Apparel reported a preliminary second-quarter loss and said it had doubts about the company's ability to continue as a "going concern," which BusinessWeek translates as looking at a potential bankruptcy.

Then there are the legal troubles. LAWeekly reports on August 26, that the third of three shareholder suits was filed against the company. The latest suit claims a violation of securities laws because of misrepresentations by the company concerning their operations and financial performance.

An earlier suit brings into play the company's woes over the immigration issues of its employees. The Weekly reports that despite assurances by the company that the immigration crackdown would not affect the company's performance, it did. Then Dov Charney turned around and blamed the company's troubles on its loss of workers. The third lawsuit cuts to the heart of the matter, saying the company was simply mismanaged and is now a damaged brand.

Taking a company public is probably one of the biggest decisions a business owner can make. Since the demands of a public company usually lead to a loss of some control by the original leadership as is illustrated by current problems of American Apparel, if there is not a strong and experienced management team in place before the company makes that leap, it may be too late to turn back later.

Even now, American Apparel is trying to rebuild some if its finance and accounting team. BusinessWeek reports the company's auditor, Deloitte & Touche, has resigned after saying it found material weaknesses in internal controls on financial reporting. The company now wants to hire back its former auditor, Marcum. Unfortunately, American Apparel is going to need a good legal team as well, if it is going to whether the current storms.

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