2012-02-27 Final Amended Complaint

8/2/2019 2012-02-27 Final Amended Complaint

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INTRODUCTION

1. Lead Plaintiff, Charles Rendelman (Lead Plaintiff or Plaintiff),alleges the following based upon Lead Counsels investigation, which included,

among other things: (i) interviews with former American Apparel, Inc. (American

Apparel or the Company) employees; (ii) a review of Defendants public

documents, conference calls and announcements, U.S. Securities and Exchange

Commission (SEC) filings, wire and press releases published by and regarding

American Apparel; and (iii) securities analysts reports and news advisories about

the Company. Lead Plaintiff believes that substantial additional evidentiary support

will exist for the allegations set forth herein after a reasonable opportunity fordiscovery.

2. This is a putative class action for violation of the federal securitieslaws brought under 10(b) and 20(a) of the Securities Exchange Act of 1934 (the

Exchange Act), and Rule 10b-5 promulgated thereunder by the SEC. Lead

Plaintiffs claims are brought on behalf of a putative class of all persons who

purchased or otherwise acquired American Apparel common stock between

November 28, 2007 and August 17, 2010, inclusive (the Class Period), to recover

damages caused by Defendants violations of the securities laws as alleged herein.

3. Defendants are: (i) American Apparel; (ii) the Companys ChiefExecutive Officer (CEO), President and Chairman of the Board of Directors

(Chairman), Dov Charney (Charney); (iii) the Companys Director of

Corporate Finance and Development, Executive Vice President and Chief Financial

Officer (CFO), Adrian Kowalewski (Kowalewski) (collectively,

Defendants);1 and (iv) Lion Capital LLP, a private investment firm with a United

States affiliate, Lion Capital (Americas) Inc. (together Lion Capital). Lion

Capital is named herein as a control person under 20(a) of the Exchange Act,

1As alleged below, Kowalewski held these titles at different times during the

Class Period.


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and is liable for the period March 13, 2009, the day Lion Capital first entered into a

private financing agreement with the Company, until August 17, 2010.

4. American Apparels shares trade under the American Stock Exchangesymbol APP. The Company reports four operating segments including U.S.

Wholesale, U.S. Retail, Canada and International. American Apparels primary

manufacturing facility is located in downtown Los Angeles where the vertically-

integrated Company employs thousands of people in the production of garments

and shirts. The Companys downtown Los Angeles facility also houses the

Companys executive offices, as well as cutting, sewing, warehousing and

distribution operations. According to the Company, its vertically integrated business model, with manufacturing and various other elements of our business

processes centered in downtown Los Angelesenable[es] [American Apparel] to

quickly respond to market and customer demand for classic styles and new

products. For our wholesale operations, being able to fulfill large orders with quick

turn-aroundallows American Apparel to capture business. The ability to quickly

respond to the market means that our retail operations can deliver on-trend apparel

in a timely manner.

5. In a June 26, 2007 analyst report initiating coverage on the Company,Ladenburg Thalmann & Co. Inc. (Ladenburg) observed that American Apparel

manufactures all its garments in the U.S., thus American Apparel. Branding is

edgy and youthful and in some instances reflects the companys pro-employee

strategy. KeyBanc Capital Markets Inc. (KeyBanc) has described American

Apparels brand as follows:

APPsdomestic manufacturing helps differentiate its brand and gives

itcompetitive advantages. The Company is closely associated with its

decision to manufacture all of its garments in Los Angeles. First and

most importantly, American manufacturing has become an integral


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part of its branding. The Company offers $9-$12 hourly wages, health

care, subsidized meals, and other additional benefits. We believe this

gives the Company a critical marketing advantage, particularly as

consciousness of workplace conditions and environmental issues

becomes increasingly important in consumer buying habits.2

6. The Companys SEC filings also reflect that, throughout the ClassPeriod, the Company rel[ied] heavily on immigrant labor to manufacture its

garments domestically, and that it made diligent efforts to comply with all

immigration laws.

SUMMARY OF THE ACTIONBackground to the Class Period

7. After starting a (since-bankrupt) T-shirt company in South Carolina in1989, Charney founded American Apparel in 1998 as a California limited liability

private company. In September 2002, PR Week ran a profile piece on American

Apparel observing that [e]verything about American Apparel, including its internal

and external PR practices, has been an organic extension of Charneys beliefs,

visions, and personality. The Companys filings with the SEC confirm that Mr.

Charney is considered intimately connected to American Apparels brand

identity. In October 2003, American Apparel opened its first retail store in Los

Angeles.

8. American Apparel was incorporated on July 22, 2005 as EndeavorAcquisition Corp. (Endeavor), a blank check company formed to acquire an

operating business. This was a signal to the market that Charney had decided to

take the Company public. On November 22, 2006, a letter of intent was executed

by Endeavor and American Apparel. The terms provided for the issuance of $190

million of Endeavor stock to Charney valued at the time at $7.75 a share. The

2 All emphasis is added.


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transaction terms were later amended to make them more favorable to Charney,

including increasing the number of shares he received and allowing him to remain

CEO. Charney also requested that the hiring of a Chief Operating Officer and Chief

Information Officer be waived as a condition to the closing. Endeavor capitulated.

9. Because of his desire to retain full control over the Companys affairs,market observers noted that Charney initially did not want to take the Company

public. In January 2006, The Guardian reported that Charney seems to relish too

much the control and the flexibility guaranteed by the absence ofshareholders to go

public. By December 2006, however, Charney was nearly broke from financing

the 150-store Company since its inception. To gain access to much needed capital(and enrich himself), on December 18, 2006, Endeavor entered into an Agreement

and Plan of Reorganization, amended November 7, 2007, with American Apparel

and its affiliated companies. Under the initial agreement, Charney was to step

down as CEO and take the title of American Apparel creative director. On

December 19, 2006, the New York Times reported that, [t]he decision to sell the

privately held company, expected to be announced today, is a surprise move by the

companys eccentric founder, Dov Charney, who is known for exercising strict, and

at times controversial, control over the retailers operations.

10. As part of the merger, Charney also revised the terms of the buy-out ofSang Ho Lim, his former 50% partner in the Company, to alleviate Charneys

personal risks at the Companys expense. As Ladenburg reported on November 9,

2007, [p]reviously, Mr. Charney was to effect the buy-out himself and in the event

that he did not complete the purchase and Endeavor stepped in, then Mr. Charneys

stake would have been reduced proportionately. Now, the number of shares Mr.

Charney receives will not be adjusted. The result of this change is that initially the

merged company will have less cash on its balance sheet.This change gives Mr.

Charney a majority stake without the burden of financing the Lim buy-out himself.


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11. Ladenburg underwrote the Endeavor IPO, earning $1.825 million forits work on the offering and, on November 15, 2007, Ladenburg reiterated its buy

rating and raised its priced target from $14.00 per share to $16.00 per share after

reviewing the Companys updated Proxy Statement. In November 2007, Charney

used Endeavors time-crunch Endeavors funds would be liquidated if the merger

was not completed by December 21, 2007 to pressure it into providing him with

more favorable terms. Under the terms of the revised deal, Charney received an

additional five million shares, worth over $77 million, giving him control of 54.3%

of the Company. Moreover, although Charney had previously agreed to receive

only a $1 salary, he pressured Endeavor into granting him a $750,000 salary withthe potential for added bonuses.

12. Endeavor consummated the acquisition of American Apparel and itsaffiliated companies on December 12, 2007, and, the same day, American Apparel

began trading on the American Stock Exchange. The acquisition was accounted for

as a reverse merger for accounting and financial reporting purposes, Endeavor was

treated as the acquired company, and American Apparel was treated as the

acquiring company.3 Charney has served as Chairman, CEO, President and a

director of American Apparel since the consummation of the acquisition on

December 12, 2007, and upon going public, Charneys reported net-worth from the

acquisition was valued at $580 million.

13. In tandem with its vertically-integrated operations, AmericanApparels provocative positions on immigration reform have also long been seen as

integral to the Companys brand, which the Company describes in its SEC filings

as one of its core business strengths. According to the Company, it has [] drawn

attention to the Made in the USA nature of its products and the Sweatshop Free

environment in which the Companys garments are produced. In turn, American

3On June 9, 2011, the SEC released a bulletin to investors warning that

reverse mergers are prone to fraud and other abuses. See Docket No. 87-2.


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Apparels pro-immigrant brand identity has long been closely tied to Charney, who

has long espoused immigration reform to promote the brand. Although Charney

may have once successfully exploited the Companys domestic manufacturing and

immigration reform positions to cultivate American Apparels brand, once he and

Kowalewski voluntarily chose to tap the public capital markets by taking American

Apparel public, they assumed duties under the federal securities laws to speak

truthfully to American Apparels shareholders and the broader market about the

Companys large undisclosed and illegal workforce.

14. By the start of the Class Period, however, Charney found himselfconflicted: either comply with his new federal securities reporting obligations and(i) voluntarily self-report that thousands of American Apparels employees were

undocumented; (ii) risk damaging the brand by terminating those workers; (iii) face

possible federal sanctions; and (iv) disrupt his efforts to take the Company public

and to profit from the acquisition; or (v) mislead investors about American

Apparels immigration compliance hoping that then-presidential candidate Barack

Obama (who promised to provide a path to citizenship for Americas roughly 12

million undocumented immigrants while campaigning in 2007) would ameliorate

the dilemma for him. Charney chose to mislead investors.

U.S. Immigration LawEmployment Requirements

15. The Immigration and Nationality Act (INA) sets forth the conditionsfor the temporary and permanent employment of all persons seeking employment in

the U.S., and includes provisions that address employment eligibility and

employment verification. The INA applies to all U.S. employers. Under the INA,

employers may only hire persons who may legally work in the U.S. Employers

must verify the identity and employment eligibility of anyone being hired, including

completing an Employment Eligibility Verification Form (I-9). A Form I-9

requires employers to review and record a prospective employees identity


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document(s) and determine whether the document(s) reasonably appear to be

genuine and related to the individual. Forms I-9 are executed under penalty of

perjury by both the employer and the employee. Employers must keep each I-9 on

file for at least three years, or one year after employment ends, whichever is longer.

16. On its website, Immigration Customs Enforcement (ICE) advises allemployers that diligent hiring practices include: (i) using E-Verify, the U.S.

Department of Homeland Security (DHS) employment eligibility verification

program, to verify the employment eligibility of all new hires; (ii) using the Social

Security Number Verification Service (SSNVS) for wage reporting purposes.

Make a good faith effort to correct and verify the names and Social Securitynumbers of the current workforce and work with employees to resolve any

discrepancies; (iii) establishing a written hiring and employment eligibility

verification policy; (iv) establishing an internal compliance and training program

related to the hiring and employment verification process, including completion of

Form I-9, how to detect fraudulent use of documents in the verification process, and

how to use E-Verify and SSNVS; (v) requiring the Form I-9 and E-Verify process

to be conducted only by individuals who have received appropriate training and

include a secondary review as part of each employees verification to minimize the

potential for a single individual to subvert the process; (vi) arranging for annual

Form I-9 audits by an external auditing firm or a trained employee not otherwise

involved in the Form I-9 process; (vii) establishing a procedure to report to ICE

credible information of suspected criminal misconduct in the employment eligibility

verification process; and (viii) establishing a tip line mechanism (inbox, e-mail,

etc.) for employees to report activity relating to the employment of unauthorized

workers, and a protocol for responding to credible employee tips.

17. A documentary appearing on the Companys website entitled IcingAmerican Apparel, revealed that the Company did not use E-Verify for worksite


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enforcement. Defendants failure to use E-Verify was not an oversight. Defendants

did not use E-Verify to avoid making a record of their illegal hiring practices.

Confidential Witness (CW) 10, a former Executive Assistant to the Companys

former Human Resources Director (Kristina Moreno (Moreno)), who worked at

the Company from August 2006 until the spring of 2008, confirmed that American

Apparel did not use E-Verify. On March 29, 2007, as Charney and Kowalewski

were preparing to take American Apparel public, DHS and ICE initiated an

investigation of American Apparel which, according to ICE, appeared to be

unlawfully employing aliens who are unauthorized to work in the United States, in

violation of Title 8, United States Code, Section 1324a.

Defendants False and MisleadingImmigration Compliance Statements and Omissions

18. Throughout the Class Period, Defendants repeatedly told investors infilings made with the SEC that American Apparel: (i) made diligent efforts to

comply with all employment and labor regulations, including immigration laws;

(ii) that [m]any of American Apparels workers are documented immigrants and

authorized to work in the United States; and (iii) that it was the Companys

policy, and has been at all times, to fully comply with its obligations under U.S.

immigration laws. As alleged herein, these representations were all knowingly false

when made.

19. The Class Period begins on November 28, 2007, with the filing of theCompanys Definitive Proxy Statement with the SEC on Form 14-A (November

2007 Proxy). The November 2007 Proxy gave shareholders notice that a Special

Meeting of Stockholders would be held on December 12, 2007, the first day

American Apparels shares traded on the American Stock Exchange, and

misrepresented to investors that [m]any of American Apparels workers are

documented immigrants, authorized to work in the United States. This statement

was false because, as alleged herein, Defendants had, for over a decade, knowingly


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employed thousands of undocumented workers at the Companys Los Angeles

garment factory, many of whom Charney knew personally and described as

family.

20. On November 29, 2007, ICE special agents served a Notice ofInspection on American Apparel (Inspection Notice) for all current

manufacturing employees at the Companys downtown Los Angeles factory (where

Charneys and Kowalewskis executive offices were also located). The Inspection

Notice advised Defendants that ICE special agents were scheduled to inspect the

Companys records on December 12, 2007 the day American Apparel was slated

to go public. A former American Apparel employee, who worked in AmericanApparels Human Resources Department from mid-2006 through January 2010

(CW9), stated that the Company actually learned of the ICE I-9 audit in August

or September 2007. CW10 corroborates that the Company had already gathered

Forms I-9 a couple of months before the Inspection Notice was served on the

Company in November 2007.

21. Kristina Moreno, the Companys then Human Resources Director, whoreported directly to Charney, instructed a team to gather the Forms I-9 for

documentation in August/September 2007 to: (i) verify that every employee had a

Form I-9; (ii) review the Forms I-9 to make sure they were filled out correctly; and

(iii) ensure there were copies of the documentation. CW10 was instructed to fix

any Forms I-9 with missing information, including forging the I-9s to make them

appear to have been signed within three days of the employees hire date an

immigration law requirement made explicit on all Forms I-9. On December 10,

2007, Defendants sought and obtained an extension for the inspection. The

inspection was rescheduled for January 3, 2008.

22. The Inspection Notice expressly advised Defendants that ICE/DHSspecial agents would be on site to review all Forms I-9 for the Companys


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manufacturing employees.4

On January 3, 2008, ICE agents descended on the

Companys headquarters and personally hand-counted the Forms I-9 in front of the

Companys Chief Operating Officer (Martin Bailey (Bailey)), in-house counsel

(Joyce Crucillo (Crucillo)) and outside counsel. Bailey and Crucillo each

reported directly to Charney and Kowalewski. Despite being asked to certify ICEs

count, suspiciously, management was unwilling to do so. To the contrary, Crucillo

actually made a handwritten notation on an ICE document that [i]nitial hand count

was made by U.S. Immigration Customs Enforcement, not verified by company

representative.

23. According to ICE, the Company represented that, as of January 2,2008, there were 3,562 manufacturing employees at the Company. However, on

January 3, 2008, American Apparel presented only 3,554 Forms I-9 to the ICE

agents. Since the Company presented fewer Forms I-9 than workers, Defendants

knew, as of that time, that the Company was in existing violation of U.S.

immigration law because immigration laws mandate that every employee have a

Form I-9. Later, on August 25, 2009, ICE rechecked the two boxes of original

Forms I-9 and again determined that American Apparel had failed to prepare and

present original Forms I-9 for 85 employees and concluded that the Company

would be charged with failure to prepare and present Forms I-9 for 85 employees.

24. Despite the Inspection Notices obvious importance to investors giventhe Companys heavy reliance on immigrant labor, Defendants failed to disclose the

Inspection Notice until March 2008. Between November 29, 2007 and March

2008, however, Defendants made numerous other statements about the Companys

immigrant workforce that obligated Defendants to disclose the Inspection Notice.

On December 5, 2007, for instance, the Company filed a post-effective amendment

to its Registration Statement which incorporated by reference the November 2007

4A Form I-9 is used to establish the employment eligibility for all potential

employees in the United States. See Exhibit A.


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Proxy statement that [m]any of American Apparels workers are documented

immigrants, authorized to work in the United States.

25. Then, on December 11 and 18, 2007, the Company filed press releaseson Forms 8-K with the SEC that told investorsto read the November 2007 Proxy,

but again failed to disclose that the Company had already received the Inspection

Notice, and that the Company was already in existing violation of U.S. immigration

laws. On January 18, 2008, Charney personally made extensive statements to the

New York Times regarding American Apparels non-American-born labor force

and support for immigration reform, stating that amnesty is at the core of my

company, at the core of my soul. Again, by making these statements without alsorevealing the Inspection Notice, Charneys January 18, 2008 statements were

rendered misleading when made.

26. On March 17, 2008, the Companys 2007 Annual Report on Form 10-K (2007 Annual Report) disclosed the Inspection Notice, stating that [i]n late

2007, American Apparel received a notice from the Immigration and Customs

Enforcement division of the U.S. Department of Homeland Security [] requesting to

inspect the I-9 forms of the employees of American Apparel, Inc. In January 2008,

American Apparel provided ICE with access to the requested forms. The 2007

Annual Report also stated that even if no violations are found, American Apparel

couldexperience employee turnover.

27. This too was misleading, as by March 17, 2008, Defendants knew that:(i) violationshad alreadybeen found; (ii) the Company had not given ICE access to

all the requested Forms I-9; and (iii) that the Company would experience massive

disruptions in connection with the I-9 audit. Indeed, when the audit started on

January 3, 2008, many of the Companys undocumented workers, fearful of being

deported, stopped showing up for work and whole sections of the factory went dark.

Prior to the audit, by contrast, where Charney spent 50 hours per week, the


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factory operated 24 hours a day for five or six days a week. Charney therefore saw

first-hand the disruptions caused merely by the I-9 audit itself.

Defendants Partially Disclose

Their Illegal Workforce28. On March 16, 2009, the Companys 2008 Annual Report on Form 10-

K (2008 Annual Report), represented that American Apparel has not had any

further communications with ICE since this [January 3, 2008] request [for

Forms I-9] was fulfilled. This statement was misleading because Defendants had

been in constant communication with ICE about the inspection, and were receiving

regular updates regarding ICEs negative findings. In a July 3, 2009 New York

Times article, the Companys outside counsel, Peter Schey (Schey) later admitted

that there had been discussions over 18 months between federal officials and

American Apparel, after immigration agents first inspected the companys files in

January 2008. ICE documents corroborate that, starting January 3, 2008, the

Company was routinely updated by ICE special agents regarding ICEs negative

findings. In addition, because the Company was forging I-9 documents starting in

August/September 2007 in anticipation of the January 3, 2008 audit, Defendants

knew as early as fall 2007 that they were in noncompliance with U.S. immigration

laws because hundreds of the documents they had tried to verify were fake.

29. Then, on June 30, 2009, American Apparel revealed that one-third ofthe Companys Los Angeles-based manufacturing employees (i.e., approximately

1,800 people) were found not to be authorized to work in the United States, and

were being terminated. The same press release, however, failed to also disclose

that over 700 or so other employees simply stopped coming to work as a result of

the ongoing I-9 audit. An article appearing in Fast Company dated August 24,

2010, which reported on a leaked statement Charney made during an internal

Company conference call, confirmed that, in fact, 2,500 of the Companys

approximately 3,500 garment manufacturing employees had been lost due to the


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investigation. These revelations directly contradicted Defendants prior public

statements that the Company made diligent efforts to comply with all employment

and labor regulations, including immigration laws, and that its manufacturing

employees were documented immigrants and authorized to work in the United

States.5

30. The same day, Defendants also misleadingly insisted that it is theCompanys policy, and has been at all times, to fully comply with its obligations to

establish the employment eligibility of prospective employees under immigration

laws. Given that, as of January 3, 2008, Defendants were aware that the Company

was already in violation of U.S. immigration laws by failing to present sufficientForms I-9 to ICE, Defendants made this statement with actual knowledge of its

falsity. In response to this news, between June 30, 2009 and July 2, 2009, the

Companys stock price tumbled approximately 16% on unusually heavy trading

volume.

31. Ultimately, in stark contrast to Defendants Class Periodrepresentations, the I-9 audit concluded that immigration compliance was not a

priority for the [] company and that American Apparel runs the risk of hiring

unauthorized aliens by not preparing Forms I-9 for all of their employees. This can

be shown by the large amount of unauthorized aliens employed at their

company. ICE found massive irregularities in the Companys hiring practices,

including the fact that 84.5% of the 2,297 employees with alien numbers at the

Company were undocumented. A former American Apparel Customer Service

Supervisor (CW1) who worked at the Companys downtown facility during the

Class Period corroborated ICEs findings, stating that the Company routinely hired

5 After the Company was fined by ICE for its immigration law violations,

Charney awarded himself a performance bonus of $1,124,401 for his service for theyear ended December 31, 2009.


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undocumented workers. CW1 knew of at least three people in his/her department

who lacked proper documentation.

32. After the terminations, ICE determined that the Company had actuallyrehired some of the terminated workers. On July 2, 2010, an ICE special agent

conducted another review of the Company to determine if there were any

employees who had been listed on the Notice of Suspect Documents who were

still working at the Company. The Notice of Suspect Documents which was

served on the Company in June 2009, found that:

[T]here were 41 employees listed on the Forms DE6 who had the same

or similar sounding names of 41 employees that had also been listed onthe Notice of Suspect Documents.6 These 41 employees were also

listed on a spreadsheet that [the Company] had sent to ICE and it

indicated that they had been terminated, resigned, laid off, or

abandoned their jobs. Forty of these employees had presented new

Social Security numbers. One employee used the same Social

Security number. One employee the company left off the spreadsheet.

There were also six employees who the company had listed as updated

on the spreadsheet and it was found that they also did not have

employment authorization.

33. Former American Apparel employees corroborate that the Companyrehired some of the undocumented workers who had been previously terminated

(see 84-85, 87, 102, 139, infra). As alleged below, the Company rehired these

skilled workers in a desperate (yet failed) effort to try to stem the severe disruptions

caused by the mass terminations.

6 A DE6 is a California payroll tax form.


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Defendants Mislead InvestorsAbout the Effects of the Terminations

34. In connection with the Companys disclosures about the terminations,Defendants misleadingly assured investors that even if the Company were to lose

substantially all of the 1,800 identified employees (which represent approximately

one-third of the 5,600 employees the Company currently employs in its

manufacturing operations in the Los Angeles area), the Company does not presently

believe that the loss of employees would have a materially adverse impact on its

financial results. In a press release on Form 8-K dated July 1, 2009, the Company

also misrepresented that it has been the Companys policy to fully comply with its

obligations to establish the employment eligibility of prospective employees underimmigration laws and that the Company believes that its current surplus levels of

inventory and production capacity will mitigate the adverse impact of any

disruption to its manufacturing activities that may potentially result from the loss of

these employees. To the extent that the Company may need to hire replacement

workers, the Company presently believes it would only need to hire for a fraction

of those employees that would be terminated. The Company currently has a

significant backlog of active job applications. Former American Apparel

employees dispute these accounts. See 81, 83, 138, infra.

35. In truth, Defendants knew that the loss of thousands of its most skilledand efficient workers was having an immediate adverse impact on the Companys

publicly-touted and once-nimble vertically-integrated operations. Before the

Company even began terminating its workers in 3Q09, the Company preemptively

hired new manufacturing employees to try to stem the anticipated disruptions. As

early as June 2009, Defendants doubled-up on workers by having two individuals

perform the same tasks, something that was not only inefficient, but caused the

Companys operating costs to rise.


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36. After a meeting with Charney on July 1, 2009, KeyBanc analystEdward Yruma noted in a research report on American Apparel that

[m]anagement was clear in emphasizing thateven if a significant number of the

1,800 employees are deemed ineligible to work, the Company should not see a

material financial impact. Made in Los Angeles is key to the brand,management

should be able to replace workers. At the same time Defendants were

misleadingly allaying investors concerns, Defendants knew that the workers had

already been deemed ineligible to work, and that the Company was having grave

difficulties replacing those workers. See 81, 83, 126-27, 138, infra.

37. A former Manufacturing Division Controller, who worked at AmericanApparel from 2008 until mid-June 2010 (CW2), confirms that the impact of the

dismissals in 3Q09 was evident at the Company no later than 4Q09, and that

Charney was personally aware of the significant negative impact caused by the

workforce reduction. A former Distribution/Returns Supervisor at the Company

from August 2009 to early 2010 (CW3), stated that it was ridiculous for Charney

to suggest that he did not know about the loss of productivity which began

negatively impacting the Companys operations immediately following the loss of

workers who were either terminated, or altogether stopped showing up. In addition

to requiring substantial training, the replacement workers were generally slower

than the far more skilled and efficient terminated workers who had been at the

Company for up to a decade.

38. Contrary to what Defendants told investors on June 30 and July 1,2009, therefore, it was not the Companys policy to fully comply with its

obligations to establish eligibility of prospective employees under immigration

laws because, at the same time they were making these statements, Defendants

were rehiring the same undocumented employees they knew were undocumented.


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As alleged herein, Defendants failed to fully disclose these facts to investors until

almost a year later in May 2010.

39. On a November 10, 2009 earnings conference call with analysts for3Q09, then-CFO Kowalewski misleadingly responded to an analyst question about

the implications of terminations, saying I think what we said back in July [2009]

when we had this issue was we didnt think it [(the ICE enforcement action)] was

going to have a material impact to our financial results. During the same call,

Kowalewski also falsely characterized the loss of the Companys manufacturing

employees as a competitive advantage that would result in lower costs, explaining

that because we had been operating with a higher number of workers than maybewe would have needed under normal circumstances. So we do think some of the

head count has improved our overhead situation. During the same call, Charney

stated that he agree[d] with what Adrian [Kowalewski] said. These statements

were highly misleading because, at the time they were made, Defendants had actual

knowledge that the terminations were having grave effects on the Companys

financial and operating performance, and that costs had increaseddramatically due

to the inefficiencies associated with doubling up on workers.

40. A former Resource Assignor in American Apparels Production andPlanning Department from November 2007 until the beginning of 2010 (CW5),

confirmed that the workforce reduction negatively affected production in 3Q09

because the replacement employees were inexperienced, and could not perform

their jobs as efficiently as the more experienced terminated workers. CW5

estimates that the new employees were only producing half as much as the

employees who were terminated. This assertion was based, in part, on the

Companys delay in bringing certain clothing styles to market i.e., American

Apparel was still putting out swimwear and summer attire in the fall of 2009.


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41. Ultimately, as alleged herein, the impact of the dismissals was evidentat the Company at the same time Defendants were telling investors that the loss of

the Companys manufacturing employees was a competitive advantage that would

result in lower costs(see39, supra). At the direct ion of the Companys

management, there was a mad rush to hire replacement employees in 3Q09 and

4Q09, which resulted in almost double the number of employees in the same

manufacturing positions. While payroll was increasing during June through

September 2009, productivity was slowing down, and sales were not keeping up

with the Companys bloated expenses. Charney knew in real time about the

significant negative impact caused by the dismissal of manufacturing workers because Charney was heavily involved in every aspect of American Apparels

operations. Other former American Apparel employees confirm these accounts (see

80-84, 86-87, 89-91, 101-02, 134-38, infra).

Defendants Partially (and Belatedly) Disclosethe Terminations Negative Effects

42. On March 31, 2010, the Company filed its 2009 Annual Report onForm 10-K (2009 Annual Report), which conceded that American Apparels

cost of sales was [] negatively impacted by lower capacity utilization of our

manufacturing facilities in the first half of 2009, and the substantial reduction in

manufacturing efficiency experienced in the fourth quarter of 2009 at our

production facilities. Then, on May 19, 2010, the Company revealed that the

Companys gross margins had been negatively impacted by reduced labor

efficiency at the Companys Los Angeles production facilities due to the fact that

1,500 experienced manufacturing employees had been dismissed in 3Q09 and

4Q09.

43. The Company also disclosed that the impact of the lowermanufacturing efficiency could impact its financial results into 2011, and that the

reduction in labor efficiency was a result of the dismissal of over 1,500


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experienced manufacturing employees in the third and fourth quarters of 2009

following the completion of an I-9 inspection by U.S. Immigration and Customs

Enforcement. On a same-day May 19, 2010 conference call following the

Companys press release, Charney conceded the absence of factory employee

stability that both he and Kowalewski had touted only months earlier (see 39,

supra):

We didnt move quickly enough after we had the immigration

intervention. We were still in the mode it was a culture.We should

have been hiring more people.We are off our game but we are going

to get back on our game as far as in a way the fact that we had thisMade in USA factory we were not getting the full benefit of it because

actually we dont have enough people.

44. Upon the release of this news, which starkly contradicted Defendants prior statements that the terminations had improved [] overhead and that there

was stability in the workforce, shares of the Companys stock plunged40.51%, to

close on May 19, 2010 at $1.63 per share, on unusually heavy trading volume.

45. Finally, on August 17, 2010, the Company announced in a pressrelease on Form 8-K that it would report a loss from operations of $5 million to $7

million for the quarter. Again, the primary reason cited for the loss was lower

labor efficiency at the Companys production facilities, which was the direct result

of both the mass workforce terminations, and the replacement hiring of over 1,600

net new manufacturing workers during the second quarter of 2010. The same day,

Defendants, for the first time, also disclosed that the Company might not have

sufficient liquidity necessary to sustain operations for the next twelve months, and

that there existed substantial doubt that the Company will be able to continue as a

going concern. On this news, shares of the Companys stock tumbled an

additional 25.9%, to close on August 17, 2010 at $1.03 per share, on heavy trading


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volume. As the market continued to digest this news, the Companys stock fell an

additional 27.2%, to close on August 19, 2010 at approximately $0.75 per share, on

unusually heavy trading volume.

46. After the full impact of the immigration violations came to light, nearlyforcing the Company into bankruptcy, the Company granted 6.5 million shares of

stock (almost 9% of the Company) to executive and non-executive management

employees and certain consultants which significantly diluted already depressed

shareholder value.7

Defendants Mislead Investors AboutTheir Reckless Business Practices

47. Only a few months after taking the Company public, Charneys highlyreckless approach to running his new publicly-traded company began to manifest.

In a March 20, 2008, interview with the Wall Street Journal, Charney humiliated

his then-current CFO, Ken Cieply (Cieply), saying Mr. Cieply had no

credibility and was a complete loser. The very next day, Charney reversed

course, calling his words juvenile and apologized in a letter to the Wall Street

Journal, writing that Mr. Cieply had enormous credibility. To market observers,

Charneys public attack on the Companys own CFO was astonishing because the

Company had just gone public, and Mr. Cieplys 2007 base salary had just been

increased 20%. Mr. Cieply resigned a short time after Charneys comments.

48. In a press release on Form 8-K filed with the SEC on December 31,2008, the Company announced that it had replaced Mr. Cieply with Kowalewski.

Kowalewski succeeded William T. Gochnauer, who had served as the Companys

Interim CFO (replacing Mr. Cieply) since May 22, 2008. Kowalewski initially

joined the Company in 2006 as an intern and had previously been the Companys

7Under the terms of the acquisition, Charney was prohibited from selling any

Company shares from December 12, 2007 until December 12, 2010. On March 13,2009, as part of the financing agreement with Lion Capital, the three year lock upagreement was, subject to certain conditions, extended until December 31, 2013.


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Director of Corporate Financing and Development. Kowalewski was promoted to

CFO of American Apparel at the age of 31 a mere two years after he earned his

Masters of Business Administration degree in 2006.8 Charneys promotion of the

sorely untested and inexperienced Kowalewski to replace Mr. Cieply was

deliberate.

49. With a grossly inexperienced CFO and Charney lackey nowresponsible for American Apparels public financial statements, Charney enabled

himself to continue to manage the Companys finances and other operations with

little oversight or accountability. On a May 13, 2008 earnings conference call for

1Q08 after the Wall Street Journal loser article appeared, Charney falselyreassured investors that the Company was looking to build a world class financial

team. We want to we have a very creative company and a creative brand, but we

want to pursue a strict corporate orthodoxy as far as financial accounting issues

and putting together a team. And were studying that and working on that very

closely. This statement was misleading because Charney knew that American

Apparels financial accounting practices were anything but strict, and that the

Companys internal controls were virtually non-existent. This would only worsen

with Kowalewski far from a world class financial executive as CFO.

50. As part of the Companys efforts to rehabilitate its image, AmericanApparel hired Deloitte & Touche LLP (Deloitte) as its registered independent

public auditor in April 2009. After the Deloitte hire, a KeyBanc report dated April

22, 2009, highlighted that the Company was [c]ommitted to best practices. The

question was asked about whatmanagement views as a Street misperception about

the Company, to which management highlighted the flawed view that the Company

is disorganized and unsystematic internally. Charney emphasized the Companys

8 See Exhibit B.


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commitment to conservatism and maintaining best practices. In response to this

news, the Companys stock price jumped 7.66%.

51. Then, on July 28, 2010, the Company was forced to announce that,effective July 22, 2010, after only 16 months with the Company, Deloitte had

resigned as the Companys independent auditor because it was no longer willing

to rely on managements representations due to Deloittes belief that management

withheldfrom Deloitte the February 2010 monthly financial statements until after

the filing of the 2009 10-K and made related misrepresentations. Far from

pursuing a strict corporate orthodoxy, in other words, Defendants were

withholding negative financial information not only from investors but theCompanys own auditor. The negative financial information Defendants withheld

from Deloitte concerned the significant disruptions that the forced workforce

reductions had on the Company in 2009. Deloitte resigned because it had been

lured into expressing an unqualified opinion for the Companys 2009 Annual

Report when, in truth, the Company was facing bankruptcy.

52. Due to the significant negative impact the terminations had on theCompanys financial performance, liquidity and overall business condition, in 2009

and into early 2010, American Apparel was in desperate need of additional

financing and covenant waivers. Defendants knew that such financing and waivers

would be far more difficult (and prohibitively expensive) to obtain if the Company:

(i) issued a going concern qualification in its 2009 Annual Report; and (ii)

disclosed the serious deterioration in its financial condition as a result of the

terminations in 2009. Had Deloitte timely been given access to the Companys

negative financial statements, Deloitte would have insisted on an adverse going

concern disclosure in the Companys 2009 Annual Report. Defendants

deliberately withheld this crucial adverse financial information and negative trends

from Deloitte, thus enabling themselves to issue financial statements and other


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positive qualitative statements without alerting investors to the severity of the risk

that American Apparel could go bankrupt due to the terminations.

53. On July 28, 2010, Defendants also revealed that Deloitte had resigned because certain information had come to Deloittes attention that if further

investigated may materially impact the reliability of either its previously issued

audit report or the underlying consolidated financial statements for the year ended

December 31, 2009 included in the Companys 2009 Form 10-K. Deloitte later

withdrew its audit for all of the Companys 2009 financial statements, warning

investors that they should no longer be relied upon. On this news, the Companys

stock price fell 14.36% on unusually heavy volume. In an interview with theLosAngeles Times on July 29, 2010, Charney spun the Deloitte resignation, stating it

was a good step for the company.

54. On August 17, 2010, American Apparel revealed additional facts aboutthe Deloitte resignation, admitting [i]t is the Companys understanding that

certain information [as used by Deloitte] refers to the Companys financial results

for the first quarter of 2010, trends in the Companys business occurring after the

first quarter of 2010 and the Companys projected financial results for the

remainder of 2010 as of April 30, 2010. In addition, while the Company has

disputed Deloittes account, Deloitte stood by its position that Defendants

committed an accounting fraud, explaining we believe that we requested the

February 2010 financial information prior to issuing our reports and that

management informed us that such information was not available. In truth,

management had the information; they just did not want it shared publicly.

55. The same day, Defendants disclosed that they had received a GrandJury subpoena dated July 30, 2010 (i.e., a week after Deloitte quit) from the

Department of Justice (DOJ) for the production of documents relating to the

circumstances surrounding the Deloitte resignation and a related inquiry from the


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SEC regarding the matter. Then, in November 2010, it was also revealed that

American Apparel had also received a subpoena from the U.S. Attorneys Office

for the Central District of California for documents relating to an official criminal

investigation being conducted by the Federal Bureau of Investigation (FBI) into

Deloittes resignation and the Companys financial reporting and internal controls.

The DOJ criminal investigation is ongoing. On August 19, 2010, retail trade

publication Womens Wear Daily (WWD) quoted an experienced corporate

lawyer who aptly observed [a]nytime auditors step back, youve really got to take

a hard look at whether there was fraud.

56. In response to this and other same-day negative announcements, theCompany stock price fell over46% between August 16 and August 19, 2010 as the

market digested the full impact of these adverse disclosures.

Post-Class Period Events

57. On December 7, 2010, the SEC sent Kowalewski a letter requesting,among other things, additional information about the representation in the

Companys 2009 Annual Report that cost of sales was negatively impacted by

lower capacity utilization in the first half of 2009 and a substantialreduction in

manufacturing efficiency in the fourth quarter of 2009 at your production facilities.

In a letter to the SEC dated February 15, 2011, Kowalewski responded that:

During the fourth quarter of 2009, the production of the sewing

operators employed by the Company decreased as a result of the

turnover in staff from the dismissal in connection with the I-9

inspection by U.S. Immigration and Customs Enforcement during the

third quarter of 2009, as well as the hiring of over 500 new

manufacturing employees during the fourth quarter of 2009. Newer or

less-experienced sewing operators typically produce at a lower rate

than more experienced operators. At the current time,the Companys


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systems do not allow for reliable detailed enumerations of the

individual components of the change.

58. Earlier, however, in March 2009, Defendants boasted about theCompanys systems saying we get daily inventories at this point. The whole

creative team has access to inventory turns by color, by fabric style. The amount of

information we are getting is incredible. And not only is it we have a department

of people now that are involved in designing, creating reports, and I believe we can

continue to improve inventory trends, but also by knowing what we have and

knowing what is selling and whats trending. This visibility also allowed

Defendants, according to Kowalewski to bettertrack the cost of inventory.59. On March 31, 2011 American Apparel filed its long-delayed 2010

Annual Report on Form 10-K with the SEC (2010 Annual Report). The 2010

Annual Report admitted a litany of irregularities at American Apparel during the

Class Period.9

First, the 2010 Annual Report included its new auditors adverse

opinion on the effectiveness of the Companys internal control over financial

reporting [during the Class Period] because of the existence of material weaknesses

[at the Company].10 The adverse opinion concluded that, during the Class Period:

(i) the company did not maintain an adequate control environment that fully

emphasized the establishment of, adherence to, or adequate communication

regarding appropriate internal control over financial reporting; and (ii) the

Company did not perform adequate independent reviews and maintain effective

controls over the preparation of financial statements. In addition, the 2010 Annual

Report belatedly confirmed that [i]f American Apparel is unable to successfully

9Kowalewski was replaced as CFO on February 7, 2011.

10 Its new auditor, Marcum LLP (Marcum), was previously fired as theCompanys independent auditor in April 2009 after disclosing materialweaknesses in American Apparels internal control over financial reporting.


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implement steps to improve its liquidity position, it may need to voluntarily seek

protection under Chapter 11 of the U.S. Bankruptcy Code.

60. In a press release dated April 1, 2011, the Company also revealed thatLion Capital, a private investment fund that loaned the Company $80 million in

March 2009, had suddenly removed its two designated directors (who were

simultaneously Lion Capital partners) Lyndon Lea (Lea) and Neil Richardson

(Richardson) from American Apparels Board of Directors (the Board). For

investors, Lion Capitals belated attempt to distance itself from Defendants was too

little, too late. After the removal of Lion Capitals directors from the Board,

Defendants admitted that Lea and Richardson were removed to eliminate conflictsof interest created by Lion Capitals role as a lender and creditor to the Company

during the Class Period.

61. Finally, in addition to former CFO Ken Cieply, who resigned from theCompany in 2008, and Deloittes noisy withdrawal in July 2010, American Apparel

has suffered a slew of additional high-level resignations since the end of the Class

Period, including:

Keith Miller, a member of the Companys Board, Audit Committeeand Chairman of the Compensation Committee during the Class Period

resigned on May 2, 2011, publicly lamenting the erosion Charneys

conduct had caused the Companys shareholders.

Audit Committee members Mark Samson and Mark Thorton resignedon July 1, 2011.

Tom Casey, Acting President of American Apparel who was hired inOctober 2010 to validate the Companys strategy, improve operating

disciplines and optimize the capital structure, resigned a short time

later on November 18, 2011, two months shy of his employment

contract with the Company.


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Marty Staff (Chief Business Development Officer), who was personally hired by Charney, resigned in October 2011, stating that

Dov [Charney] is a one-man band, and I dont think I realized how

singular that vision is. When I joined, I dont think I realized how

actively Dov manages every part of the company from design to IT

to marketing to finance. All roads lead through Dov. No judgment on

that, but I think I was used to something more collaborative.

62. Mr. Staffs perspectives on Charneys singular control over theCompanys operations were most recently described on December 22, 2011, when

the Company itselfwas required to issue an unprecedented press release on Form 8-K explaining that [l]ast week, an article appeared in a trade publication that

referred to estimates of American Apparel, Inc.s [] fiscal 2011 EBITDA that were

attributed to our Chief Executive Officer. Consistent with the Companys policy

to not make projections of EBITDA or other financial performance measures, the

Company hereby disclaims such estimates and cautions that no reliance should

be placed on them. In other words, American Apparel is now itself finally

warning the Companys shareholders not to rely on Charneys public statements.

Charney may be one of fashions leading innovators, but, as alleged herein, he is

simply incapable of serving as the CEO of a publicly-traded Company.

JURISDICTION AND VENUE

63. The claims asserted herein arise under and pursuant to 10(b) and20(a) of the Exchange Act, (15 U.S.C. 78j(b) and 78t(a)) and Rule 10b-5

promulgated thereunder (17 C.F.R. 240.10b-5).

64. This Court has jurisdiction over the subject matter of this actionpursuant to 27 of the Exchange Act (15 U.S.C. 78aa) and 28 U.S.C. 1331.

65. Venue is proper in this District pursuant to 27 of the Exchange Act,15 U.S.C. 78aa and 28 U.S.C. 1391(b). Many of the acts and transactions alleged


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herein, including the preparation and dissemination of materially false and

misleading information, occurred in substantial part in this District. Additionally,

American Apparels principal executive offices are located within this District.

66. In connection with the acts, conduct and other wrongs alleged in thisComplaint, Defendants, directly or indirectly, used the means and instrumentalities

of interstate commerce.THE PARTIES

67. Lead Plaintiff, Charles Rendelman, as detailed in the Certification of Named Plaintiff attached to his motion for appointment of lead plaintiff filed on

October 25, 2010, and incorporated by reference herein, purchased American

Apparel securities at artificially inflated prices during the Class Period and has been

damaged thereby.

68. Defendant American Apparel is a Delaware corporation with its principal executive offices located at 747 Warehouse Street, Los Angeles,

California 90021.

69. Defendant Charney was, at all relevant times, the CompanysPresident, CEO, and Chairman of the Board. Charney also served as the President,

CEO, director and founder of American Apparels predecessor, Old American

Apparel, as well as its predecessor companies dating back to 1989. As CEO,

Charney was responsible for and/or signed Company filings with the SEC,

including the November 2007 Proxy; May 16, 2008 Form 10-Q (1Q08 10-Q); the

August 15, 2008 Form 10-Q (2Q08 10-Q); the November 10, 2008 Form 10-Q

(3Q08 10-Q); the 2008 Annual Report; the April 29, 2009 Proxy Statement; theJune 30, 2009 Form 8-K; the August 13, 2009 Form 10-Q (1Q09 10-Q); the

August 17, 2009 Form 10-Q (2Q09 10-Q); the September 11, 2009 Proxy

Statement; the November 10, 2009 Form 10-Q (3Q09 10-Q); the 2009 Annual

Report; the October 15, 2010 Proxy Statement and the 2010 Annual Report.


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70. In addition, for every reporting quarter during the Class Period,Charney personally signed a Certification pursuant to 302 of the Sarbanes-Oxley

Act of 2002 that certified as follows:

I, Dov Charney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AmericaApparel, Inc.

2. Based on my knowledge, this report does not contain any untruestatement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the

period covered by this report;

3. Based on my knowledge, the financial statements, and other financial

information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this report;

4. The registrants other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internalcontrol over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the periodin which this report is being prepared;

b) Designed such internal control over financial reporting, or causedsuch internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generallyaccepted accounting principles;

c) Evaluated the effectiveness of the registrants disclosure controls

and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as othe end of the period covered by this report based on suchevaluation; and

d) Disclosed in this report any change in the registrants internalcontrol over financial reporting that occurred during theregistrants most recent fiscal quarter (the registrants fourthfiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the


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registrants internal control over financial reporting; and

5. The registrants other certifying officer and I have disclosed, basedon our most recent evaluation of internal control over financialreporting, to the registrants auditors and the audit committee of theregistrants board of directors (or persons performing the equivalent

functions):a) All significant deficiencies and material weaknesses in the design

or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrants ability torecord, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrantsinternal control over financial reporting.

71. Defendant Kowalewski was, at relevant times, the CompanysExecutive Vice President and CFO, as well as a Director. Kowalewski served as

the Companys Director of Corporate Finance and Development from 2006 through

December 2008. As CFO, Kowalewski was responsible for and/or signed Company

filings with the SEC, including the 2008 Annual Report, the 1Q09 10-Q, the 2Q09

10-Q, the 3Q09 10-Q, the 2009 Annual Report, the May 11, 2010 Form NT 10-Q,

the May 19, 2010 Form 8-K and the July 28, 2010 Form 8-K. In addition, for every

reporting quarter after Kowalewski was promoted to CFO, Kowalewski signedCertifications pursuant to 302 of the Sarbanes-Oxley Act of 2002 that, in

substantial form, were identical to that of the Sarbanes-Oxley Certification alleged

in 70, supra.

72. Defendants Charney and Kowalewski are collectively referred tohereinafter as the Individual Defendants. The Individual Defendants, because of

their positions with the Company, possessed the power and authority to control the

contents of American Apparels reports to the SEC, press releases and presentations

to securities analysts, money and portfolio managers and institutional investors, i.e.,

the market. Each Individual Defendant was provided with copies of the Companys

reports and press releases alleged herein to be misleading prior to, or shortly after,


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their issuance and had the ability and opportunity to prevent their issuance or cause

them to be corrected.

73. By reason of their positions as officers and directors of AmericanApparel and because of their ability to control the business and corporate affairs of

the Company, the Individual Defendants owed American Apparel shareholders an

absolute obligation of candor. As officers of a publicly-held company, the

Individual Defendants had a duty to promptly disseminate accurate and truthful

information with respect to the Companys operations, finances and compensation

practices. The Individual Defendants substantially participated in the issuance

and/or review of the false and/or misleading statements alleged herein, includingthe false SEC filings and reports issued to American Apparel shareholders. The

Individual Defendants possessed the power and authority to control the contents of

American Apparels Proxy Statements, quarterly reports, press releases, SEC filings

and presentations to securities analysts, money and portfolio managers, news

reporters and investors, i.e., the market.

74. The Individual Defendants were aware of their obligations to complywith applicable laws and to disclose the truth about American Apparel because such

requirements are detailed in American Apparels own Code of Ethics (Code).

The Code establishes that the Board of Directors of American Apparel, Inc. has

adopted this code of ethics (the Code), which is applicable toalldirectors, officers

and employees. The Code also requires all employees to [o]bserve all applicable

governmental laws, rules and regulations [and] [c]omply with the requirements of

applicable accounting and auditing standards, as well as Company policies, in order

to maintain a high standard of accuracy and completeness in the Companys

financial records and other business-related information and data.

75. The Individual Defendants knowingly violated these internal policies because, under the Code, the Chief Executive Officer and Chief Financial


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Officerof the Parent and each subsidiary of Parent (or persons performing similar

functions), and each other person that typically is involved in the financial reporting

of the Company must familiarize himself or herself with the disclosure

requirements applicable to the Company as well as the business and financial

operations of the Company. Defendants also violated their duty to not knowingly

misrepresent, or cause others to misrepresent, facts about the Company to others,

whether within or outside the Company, including to the Companys independent

auditors, governmental regulators, self-regulating organizations and other

governmental officials when they, among other things, withheld from Deloitte the

February 2010 monthly financial statements until after the filing of the 2009 10-Kand made related misrepresentations to Deloitte.

76. Defendants violated these Company, Generally Accepted AccountingPrinciples (GAAP) and SEC mandates by making false and misleading

statements and omissions in American Apparels financial statements regarding the

Companys compliance with immigration laws, the effect of its immigration law

violations and its financial condition. Defendants knew, or were deliberately

reckless in not knowing, that facts indicating that all of the Companys interim

financial statements, press releases, public statements, and financial filings with the

SEC, which were disseminated to the investing public during the Class Period, were

materially false and misleading. The Individual Defendants are liable for the false

statements pleaded herein, as those statements were each group-published

information, the result of the collective actions of the Individual Defendants.

Lion Capital

77. Lion Capital is a limited liability partnership with various investmentfunds incorporated in England where its registered office is located at 21 Grosvenor

Place, London, SW1X 7HF. Lion Capitals United States affiliate (Lion Capital

(Americas) Inc.) is located at 888 7th Avenue, 43rd Floor, New York, New York


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10019. Lion Capital purports to be a recognized leader in investing in consumer

businesses and was founded in 2004 by Lea, Robert Darwent and Richardson. At

various times during the Class Period, Lea, Richardson and Jacob Capps (Capps)

were simultaneously partners of Lion Capital and members of American Apparels

Board. During the Class Period, Lion Capital had the possession, direct or indirect,

of the power to direct or cause the direction of the management and policies of

American Apparel and the Individual Defendants.

CONFIDENTIAL WITNESSES

Confidential Witness 1

78. CW1 was employed at American Apparel for five and a half years prior to CW1s departure from the Company in May 2010. CW1 began as a

Customer Service Representative, and was later promoted to Supervisor in

Customer Service. CW1 sat on the seventh floor of the Companys downtown

facility, which is the same floor where American Apparel executives, including

Charney and Kowalewski, had their offices. CW1 reported to Customer Service

Manager Pat Honda, who, in turn, reported directly to Charney. CW1 often worked

directly with Charney and Chief Operating Officer Marty Bailey. According to

CW1, American Apparel hired undocumented workers regularly and did not require

employees to provide proper employment documentation. CW1 knew three people

in his/her department without proper documentation and believes they quit before

ICE formally informed the Company that it would have to dismiss employees in

June 2009.


79. CW2 was a Manufacturing Division Controller for American Apparelfrom 2008 through mid-2010. CW2 reported to Corporate Controller Adrian Taylor

(Taylor), who, in turn, reported to Kowalewski. CW2 was responsible for

recording the financial transactions and compiling the financial statements for the


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Manufacturing Division on a monthly basis. CW2 submitted this information to

Taylor, who was responsible for consolidating the information with the Companys

other two divisions retail and international into a spreadsheet of financial data

for the entire Company. CW2 believes that it was Taylors responsibility to inform

Kowalewski of any significant variances in the divisions financials. According to

CW2, the Company tracked purchasing, production, cost of goods sold, inventory,

sales and accounts payable through its ERP system, Microsoft Dynamics AX

(AX). At the end of each month, CW2 downloaded information about sales,

inventory and costs from AX into a Microsoft Excel spreadsheet. CW2 then

forwarded this information to corporate, or Taylor.80. CW2 monitored the manufacturing divisions employee headcount to

determine the impact payroll had on costs. According to CW2, the impact of the

dismissals of American Apparels manufacturing employees was evident at the

Company in 4Q09. The dismissals impacted the Companys operations with

increased labor costs and, at the same time, slower production. There was a mad

rush to hire replacement employees starting in June 2009, which resulted in almost

double the number of employees in manufacturing positions. The replacement

employees lacked skill and experience, which further increased labor costs. The

Companys financial records in July or August 2009 reflected that, while payroll

was increasing, productivity was low, and sales were not keeping up with the

Companys bloated expenses.

81. According to CW2, American Apparel experienced great difficultyreplacing the workers it lost and, by the time CW2 left the Company in June 2010,

American Apparel still had not replaced all of the employees that were terminated

due to the ICE investigation. CW2 believes that Charney knew in real time about

the significant impact caused by the dismissal of manufacturing workers because

Charney was heavily involved in every aspect of American Apparels operations.


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82. As a result of the negative impact the workforce reductions had on theCompanys costs, the Company began running afoul of debt covenants in the last

quarter of 2009 and the first quarter of 2010. Because the Companys debt

covenants required it to maintain a minimum gross operating profit (GOP), its

lenders monitored American Apparels GOP. The Company calculated its GOP

monthly at the corporate level and American Apparel executives closely monitored

and managed the debt covenants to avoid breach. Monitoring debt covenants was

one of Kowalewskis key responsibilities. According to CW2, there was a panic at

the Company during the fourth quarter of 2009, and the first quarter of 2010

because the Companys GOP fell below the lenders requirements.


83. CW3, a Distribution/Returns Supervisor from August 2009 throughearly 2010, reported to Zoreida Candelerio (Candelerio) (American Apparels

Distribution Manager). CW3 started his/her tenure at the Company around the

same time many of the undocumented workers were being terminated. CW3, who

met Charney on several occasions, stated that it was ridiculous for him to suggest

that he did not immediately know about the loss of productivity which occurred

following the loss of the undocumented employees because they would be very

difficult to replace. The workers hired to replace the skilled undocumented

employees, in addition to requiring training, were generally slower than the

undocumented workers. In an effort to raise the productivity levels of the returns

department, CW3 e-mailed Candelerio on several occasions to request that the

Company hire more replacement employees to work in the department. According

to CW3, American Apparel had difficulty hiring, and never fully replaced, the

terminated workers in the returns department.


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84. CW4 was a Production Scheduler from June 2009 through June 2010,who extracted information from American Apparels AX system, and incorporated

the information into Microsoft Excel spreadsheets in order to determine which

products/styles were needed. According to CW4, manufacturing employees who

were dismissed after failing to produce ICE documentation were later rehired by

American Apparel under different names.


85. CW5 was a Resource Assignor in American Apparels Production andPlanning Department from November 2007 until the beginning of 2010. Accordingto CW5, it was common knowledge within the Company that American Apparel

employed undocumented workers. American Apparels Human Resources

Department coached job applicants who did not have proper work documentation

on what they needed to produce to get hired by the Company. According to CW5, a

cutting floor employee who stopped working for American Apparel during the ICE

investigation in 2009 returned to the Company following the investigation with a

different last name. CW5 knew about the individuals name change because e-mail

messages CW5 received from the same individual reflected the name change.

86. The workforce reduction due to the ICE investigation in mid-2009negatively affected production because the employees hired to replace the

undocumented workers were inexperienced and could not perform their jobs as

efficiently. CW5 estimates that the new employees were only producing half as

much as the employees who were terminated. CW5s assertion that the workforce

reduction affected production was based on the Companys delay in bringing

certain clothing styles to market.


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87. CW6, who was a former employee in American Apparels BundlingSection from April 2009 through March 2010, stated that the majority of

manufacturing personnel employed at American Apparel lacked the necessary

papers to legally work at the Company. CW6 knew this because he/she spoke to

employees in CW6s department who did not have proper documentation. Even

CW6s manager was terminated as a result of the ICE inspection but, one month

after he was terminated, the manager was rehired.


88. CW7 was a Payroll Administrator at the Companys corporateheadquarters in Los Angeles from 2003 through December 2008, and was

responsible for payroll for all domestic retail store employees and corporate

employees. According to CW7, Automatic Data Processing, Inc. (ADP) served

as an outside payroll provider that processed payroll and issued paychecks for retail

and corporate employees. CW7 provided ADP with the I-9 information provided

by every employee to verify employment eligibility. ADP would verify the I-9

information and, if a social security number was incorrect, ADP would request

corrected information. When ADP notified the Company of incorrect I-9

information, CW7 would review the HR file and provide corrected information to

ADP. According to CW7, ADP did not manage the Companys factory workers

payroll. Instead, American Apparel employees located on the fifth floor of

corporate headquarters were responsible for hiring and issuing paychecks to factory

employees.


89. CW8 held various positions during his/her employment at AmericanApparel from late 2005 through mid 2008. From mid 2008 through December

2010, CW8 served as a Logistics Manager in the Companys Los Angeles


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headquarters. CW8 worked closely with Charney, and described him as being very

involved in all aspects of the business. As a Logistics Manager, CW8 was not

directly responsible for inventory management, but was involved in the movement

of inventory from the warehouse to retail stores. CW8 also worked closely with

Warehouse and Distribution Manager Candelario, who was primarily responsible

for inventory management. CW8 received his paycheck from ADP and confirmed

that Company employees on the fifth floor of Company headquarters handled

payroll for warehouse and factory employees.

90. As part of his/her duties, CW8 managed the sale o

2012-02-27 Final Amended Complaint

Documents

Transcript of 2012-02-27 Final Amended Complaint