Anthony Andrade v. American Apparel, Inc. et al 10-CV...

2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID #:2098 (' fl'J

KESSLER TOPAZ MELTZER & CHECK. LLP

Rarnzi Abadou (222567) [email protected] Eli R. Greenstein (21 7945) egreensteinktmc.corn Stacey M. Kaplan (241989) skap1anktmc.corn Erik D. Peterson (257098) epetersonktmc.com 580 California Street, Suite 1750 San Francisco, CA 94104 Telephone: (415) 400-3000 Facsimile: (415) 400-3001

Lead Counsel for Lead Plaintiff Charles Rendelman

IN RE AMERICAN APPAREL, INC SHAREHOLDER LITIGATION

This Document Relates To: ALL ACTIONS

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Li, 1IJ CE.AL (TkL.

Case No. CV-10-6352 MMM (CG)

(Consolidated)

FIRST AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

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2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID #:2099

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INTRODUCTION

1. Lead Plaintiff, Charles Rendelman (“Lead Plaintiff” or “Plaintiff”),

alleges the following based upon Lead Counsel’s 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 for

discovery.

2. This is a putative class action for violation of the federal securities

laws 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

Plaintiff’s 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 Company’s Chief

Executive Officer (“CEO”), President and Chairman of the Board of Directors

(“Chairman”), Dov Charney (“Charney”); (iii) the Company’s 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,

1 As 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

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

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4. American Apparel’s shares trade under the American Stock Exchange

4 symbol “APP.” The Company reports four operating segments – including U.S.

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Wholesale, U.S. Retail, Canada and International. American Apparel’s primary

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

7 integrated” Company employs thousands of people in the production of garments

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and shirts. The Company’s downtown Los Angeles facility also houses the

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Company’s executive offices, as well as cutting, sewing, warehousing and

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distribution operations. According to the Company, its “vertically integrated

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business model, with manufacturing and various other elements of our business

12 processes centered in downtown Los Angeles...enable[es] [American Apparel] to

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

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

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turn-around allows American Apparel to capture business. The ability to quickly

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

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in a timely manner.”

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5. In a June 26, 2007 analyst report initiating coverage on the Company,

19 Ladenburg Thalmann & Co. Inc. (“Ladenburg”) observed that American Apparel

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

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edgy and youthful and in some instances reflects the company’s pro-employee

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

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Apparel’s “brand” as follows:

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APP’s domestic manufacturing helps differentiate its brand and gives

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it competitive advantages . The Company is closely associated with its

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

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most importantly, American manufacturing has become an integral

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

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

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gives the Company a critical marketing advantage, particularly as

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consciousness of workplace conditions and environmental issues

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becomes increasingly important in consumer buying habits. 2

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6. The Company’s SEC filings also reflect that, throughout the Class

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Period, the Company “rel[ied] heavily on immigrant labor” to manufacture its

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

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immigration laws.

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SUMMARY OF THE ACTION

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Background to the Class Period

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7. After starting a (since-bankrupt) T-shirt company in South Carolina in

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1989, Charney founded American Apparel in 1998 as a California limited liability

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

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

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and external PR practices, has been an organic extension of Charney’s beliefs,

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visions, and personality.” The Company’s filings with the SEC confirm that Mr.

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Charney “is considered intimately connected to American Apparel’s brand

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

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Angeles.

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8. American Apparel was incorporated on July 22, 2005 as Endeavor

22 Acquisition Corp. (“Endeavor”), a “blank check” company formed to acquire an

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

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

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

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

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

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

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

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

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9. Because of his desire to retain full control over the Company’s affairs,

6 market observers noted that Charney initially did not want to take the Company

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

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much the control and the flexibility guaranteed by the absence of shareholders to go

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

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the 150-store Company since its inception. To gain access to much needed capital

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(and enrich himself), on December 18, 2006, Endeavor entered into an Agreement

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

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

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

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

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

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company’s eccentric founder, Dov Charney, who is known for exercising strict, and

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at times controversial, control over the retailer’s operations.”

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10. As part of the merger, Charney also revised the terms of the buy-out of

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Sang Ho Lim, his former 50% partner in the Company, to alleviate Charney’s

21 personal risks at the Company’s expense. As Ladenburg reported on November 9,

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

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that he did not complete the purchase and Endeavor stepped in, then Mr. Charney’s

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

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

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

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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 for

its 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 Company’s updated Proxy Statement. In November 2007, Charney

used Endeavor’s time-crunch – Endeavor’s 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 with

the potential for added bonuses.

12. Endeavor consummated the acquisition of American Apparel and its

affiliated 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, Charney’s reported net-worth from the

acquisition was valued at $580 million.

13. In tandem with its “vertically-integrated” operations, American

Apparel’s provocative positions on immigration reform have also long been seen as

integral to the Company’s “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 Company’s garments are produced.” In turn, American

3 On 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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Apparel’s 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 Company’s domestic manufacturing and

immigration reform positions to cultivate American Apparel’s 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 Apparel’s shareholders and the broader market about the

Company’s large undisclosed and illegal workforce.

14. By the start of the Class Period, however, Charney found himself

conflicted: either comply with his new federal securities reporting obligations and

(i) voluntarily self-report that thousands of American Apparel’s 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

Apparel’s immigration compliance hoping that then-presidential candidate Barack

Obama (who promised to provide a path to citizenship for America’s roughly 12

million undocumented immigrants while campaigning in 2007) would ameliorate

the dilemma for him. Charney chose to mislead investors.

U.S. Immigration Law Employment Requirements

15. The Immigration and Nationality Act (“INA”) sets forth the conditions

for 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 employee’s identity

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

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

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

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

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16. On its website, Immigration Customs Enforcement (“ICE”) advises all

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employers that diligent hiring practices include: (i) using E-Verify, the U.S.

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Department of Homeland Security (“DHS”) employment eligibility verification

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

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

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Make a good faith effort to correct and verify the names and Social Security

11 numbers of the current workforce and work with employees to resolve any

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

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

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

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

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

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

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include a secondary review as part of each employee’s verification to minimize the

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

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

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

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credible information of suspected criminal misconduct in the employment eligibility

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

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

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

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17. A documentary appearing on the Company’s website entitled “Icing

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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 Company’s

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 Misleading Immigration Compliance Statements and Omissions

18. Throughout the Class Period, Defendants repeatedly told investors in

filings 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 Apparel’s workers are documented immigrants and

authorized to work in the United States;” and (iii) that it was the “Company’s

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 the

Company’s 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 Apparel’s shares traded on the American Stock Exchange, and

misrepresented to investors that “[m]any of American Apparel’s 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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1 employed thousands of undocumented workers at the Company’s Los Angeles

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

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“family.”

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20. On November 29, 2007, ICE special agents served a Notice of

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Inspection on American Apparel (“Inspection Notice”) for all current

6 manufacturing employees at the Company’s downtown Los Angeles factory (where

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Charney’s and Kowalewski’s executive offices were also located). The Inspection

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

9 Company’s records on December 12, 2007 – the day American Apparel was slated

10 to go public. A former American Apparel employee, who worked in American

11 Apparel’s Human Resources Department from mid-2006 through January 2010

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

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

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

15 Company in November 2007.

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21. Kristina Moreno, the Company’s then Human Resources Director, who

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reported directly to Charney, instructed a team to gather the Forms I-9 for

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

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

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

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

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

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

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

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inspection was rescheduled for January 3, 2008.

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22. The Inspection Notice expressly advised Defendants that ICE/DHS

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special agents would be on site to review all Forms I-9 for the Company’s

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manufacturing employees. 4 On January 3, 2008, ICE agents descended on the

Company’s headquarters and personally hand-counted the Forms I-9 in front of the

Company’s 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 ICE’s

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 Notice’s obvious importance to investors given

the Company’s 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 Company’s

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

4 A 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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1 Proxy statement that “[m]any of American Apparel’s workers are documented

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immigrants, authorized to work in the United States.”

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25. Then, on December 11 and 18, 2007, the Company filed press releases

4 on Forms 8-K with the SEC that told investors to read the November 2007 Proxy,

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

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

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

8 New York Times regarding American Apparel’s “non-American-born” labor force

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

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company, at the core of my soul.” Again, by making these statements without also

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revealing the Inspection Notice, Charney’s January 18, 2008 statements were

12 rendered misleading when made.

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26. On March 17, 2008, the Company’s 2007 Annual Report on Form 10-

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K (“2007 Annual Report”) disclosed the Inspection Notice, stating that “[i]n late

15 2007, American Apparel received a notice from the Immigration and Customs

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

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

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

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

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could experience employee turnover.

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27. This too was misleading, as by March 17, 2008, Defendants knew that:

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(i) violations had already been found; (ii) the Company had not given ICE access to

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

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

25 January 3, 2008, many of the Company’s undocumented workers, fearful of being

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

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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 Workforce

28. On March 16, 2009, the Company’s 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 ICE’s negative findings. In a July 3, 2009 New York

Times article, the Company’s 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 company’s files in

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

Company was routinely updated by ICE special agents regarding ICE’s 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 of

the Company’s 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 Company’s

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 the

Company’s 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 sufficient

Forms 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

Company’s stock price tumbled approximately 16% on unusually heavy trading

volume.

31. Ultimately, in stark contrast to Defendants’ Class Period

representations, 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 Company’s 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 Company’s downtown facility during the

Class Period corroborated ICE’s 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 the year ended December 31, 2009.

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

2 who lacked proper documentation.

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32. After the terminations, ICE determined that the Company had actually

4 rehired some of the terminated workers. On July 2, 2010, an ICE special agent

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

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

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

8 served on the Company in June 2009, found that:

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

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or similar sounding names of 41 employees that had also been listed on

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the Notice of Suspect Documents. 6 These 41 employees were also

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

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

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abandoned their jobs . Forty of these employees had presented new

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Social Security numbers. One employee used the same Social

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

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

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

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employment authorization.

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33. Former American Apparel employees corroborate that the Company

21 rehired some of the undocumented workers who had been previously terminated

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

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

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caused by the mass terminations.

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Defendants Mislead Investors About the Effects of the Terminations

34. In connection with the Company’s 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 Company’s policy to fully comply with its

obligations to establish the employment eligibility of prospective employees under

immigration 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 skilled

and efficient workers was having an immediate adverse impact on the Company’s

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

Company’s operating costs to rise.

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36. After a meeting with Charney on July 1, 2009, KeyBanc analyst

2 Edward Yruma noted in a research report on American Apparel that

3 “[mJanagement was clear in emphasizing that even if a significant number of the

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

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

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

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misleadingly allaying investors’ concerns, Defendants knew that the workers had

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

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

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37. A former Manufacturing Division Controller, who worked at American

11

Apparel from 2008 until mid-June 2010 (“CW2”), confirms that the impact of the

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

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

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

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

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

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negatively impacting the Company’s operations immediately following the loss of

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

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to requiring substantial training, the replacement workers were generally slower

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

21 Company for up to a decade.

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38. Contrary to what Defendants told investors on June 30 and July 1,

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2009, therefore, it was not the Company’s “policy” to “fully comply with its

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obligations to establish eligibility of prospective employees under immigration

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

26 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

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almost a year later in May 2010.

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39. On a November 10, 2009 earnings conference call with analysts for

4 3Q09, then-CFO Kowalewski misleadingly responded to an analyst question about

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

6 when we had this issue was we didn’t think it [(the ICE enforcement action)] was

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

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Kowalewski also falsely characterized the loss of the Company’s manufacturing

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

10 that “because we had been operating with a higher number of workers than maybe

11 we would have needed under normal circumstances. So we do think some of the

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

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

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

15 knowledge that the terminations were having grave effects on the Company’s

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financial and operating performance, and that costs had increased dramatically due

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to the inefficiencies associated with doubling up on workers.

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40. A former Resource Assignor in American Apparel’s Production and

19 Planning Department from November 2007 until the beginning of 2010 (“CW5”),

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confirmed that the workforce reduction negatively affected production in 3Q09

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because the replacement employees were inexperienced, and could not perform

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

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

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

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Company’s delay in bringing certain clothing styles to market – i.e. , American

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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 evident

at the Company at the same time Defendants were telling investors that the loss of

the Company’s manufacturing employees was a competitive advantage that would

result in lower costs (see ¶39, supra). At the direct ion of the Company’s

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 Company’s 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 Apparel’s

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) Disclose the Terminations’ Negative Effects

42. On March 31, 2010, the Company filed its 2009 Annual Report on

Form 10-K (“2009 Annual Report”), which conceded that American Apparel’s

“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

Company’s gross margins had been negatively impacted by reduced labor

efficiency at the Company’s 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 lower

manufacturing 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

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

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

4 Company’s press release, Charney conceded the absence of factory employee

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

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supra):

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We didn’t move quickly enough after we had the immigration

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

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

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to get back on our game as far as – in a way the fact that we had this

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Made in USA factory we were not getting the full benefit of it because

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actually we don’t have enough people .

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44. Upon the release of this news, which starkly contradicted Defendants’

14 prior statements that the terminations had “ improved [] overhead ” and that there

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was “stability in the workforce,” shares of the Company’s stock plunged 40.51% , to

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

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45. Finally, on August 17, 2010, the Company announced in a press

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release on Form 8-K that it would report a loss from operations of $5 million to $7

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

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labor efficiency at the Company’s production facilities,” which was the direct result

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

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

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

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

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

26 going concern.” On this news, shares of the Company’s stock tumbled an

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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 Company’s 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, nearly

forcing 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 About Their Reckless Business Practices

47. Only a few months after taking the Company public, Charney’s highly

reckless 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,

Charney’s public attack on the Company’s own CFO was astonishing because the

Company had just gone public, and Mr. Cieply’s 2007 base salary had just been

increased 20%. Mr. Cieply resigned a short time after Charney’s 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 Company’s

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

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

7 Under 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 up agreement was, subject to certain conditions, extended until December 31, 2013.

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1 Director of Corporate Financing and Development. Kowalewski was promoted to

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

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Masters of Business Administration degree in 2006.8 Charney’s promotion of the

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sorely untested and inexperienced Kowalewski to replace Mr. Cieply was

deliberate.

49. With a grossly inexperienced CFO and Charney lackey now

responsible for American Apparel’s public financial statements, Charney enabled

himself to continue to manage the Company’s 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 falsely

reassured 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 we’re studying that and working on that very

closely.” This statement was misleading because Charney knew that American

Apparel’s financial accounting practices were anything but “strict,” and that the

Company’s 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 Company’s efforts to rehabilitate its image, American

Apparel 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 “ [cJommitted to best practices . The

question was asked about what management 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 Company’s

8 See Exhibit B.

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

2 news, the Company’s stock price jumped 7.66%.

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51. Then, on July 28, 2010, the Company was forced to announce that,

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effective July 22, 2010, after only 16 months with the Company, Deloitte had

5 resigned as the Company’s independent auditor because it was “ no longer willing

6 to rely on management’s representations due to Deloitte’s belief that management

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withheld from Deloitte the February 2010 monthly financial statements until after

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

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

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withholding negative financial information not only from investors but the

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Company’s own auditor. The negative financial information Defendants withheld

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from Deloitte concerned the significant disruptions that the forced workforce

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

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lured into expressing an “unqualified opinion” for the Company’s 2009 Annual

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

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52. Due to the significant negative impact the terminations had on the

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Company’s financial performance, liquidity and overall business condition, in 2009

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

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

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

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

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

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terminations in 2009. Had Deloitte timely been given access to the Company’s

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

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concern” disclosure in the Company’s 2009 Annual Report. Defendants

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deliberately withheld this crucial adverse financial information and negative trends

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

2 that American Apparel could go bankrupt due to the terminations.

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53. On July 28, 2010, Defendants also revealed that Deloitte had resigned

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because “certain information had come to Deloitte’s attention that if further

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investigated may materially impact the reliability of either its previously issued

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

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December 31, 2009 included in the Company’s 2009 Form 10-K.” Deloitte later

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withdrew its audit for all of the Company’s 2009 financial statements, warning

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investors that they should “no longer be relied upon.” On this news, the Company’s

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stock price fell 14.36% on unusually heavy volume. In an interview with the Los

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Angeles Times on July 29, 2010, Charney spun the Deloitte resignation, stating it

12 was “a good step for the company.”

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54. On August 17, 2010, American Apparel revealed additional facts about

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the Deloitte resignation, admitting “[i]t is the Company’s understanding that

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‘certain information’ [as used by Deloitte] refers to the Company’s financial results

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for the first quarter of 2010, trends in the Company’s business occurring after the

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first quarter of 2010 and the Company’s projected financial results for the

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

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disputed Deloitte’s account, Deloitte stood by its position that Defendants

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

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February 2010 financial information prior to issuing our reports and that

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

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

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55. The same day, Defendants disclosed that they had received a Grand

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Jury subpoena dated July 30, 2010 ( i.e., a week after Deloitte quit) from the

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

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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

2 American Apparel had also received a subpoena from the U.S. Attorney’s Office

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

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

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Deloitte’s resignation and the Company’s financial reporting and internal controls.

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

7 publication Women’s Wear Daily (“ WWD ”) quoted an experienced corporate

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lawyer who aptly observed “‘[a]nytime auditors step back, you’ve really got to take

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a hard look at whether there was fraud.’”

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56. In response to this and other same-day negative announcements, the

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Company stock price fell over 46% between August 16 and August 19, 2010 as the

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market digested the full impact of these adverse disclosures.

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Post-Class Period Events

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57. On December 7, 2010, the SEC sent Kowalewski a letter requesting,

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among other things, additional information about the representation in the

16 Company’s 2009 Annual Report that “cost of sales was negatively impacted by

17 lower capacity utilization in the first half of 2009 and a substantial reduction in

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

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

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

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operators employed by the Company decreased as a result of the

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

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

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

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manufacturing employees during the fourth quarter of 2009. Newer or

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less-experienced sewing operators typically produce at a lower rate

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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 the

Company’s 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 what’s trending.” This visibility also allowed

Defendants, according to Kowalewski to “better...track 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 auditor’s “ adverse

opinion on the effectiveness of the Company’s 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

9 Kowalewski was replaced as CFO on February 7, 2011. 10 Its new auditor, Marcum LLP (“Marcum”), was previously fired as the Company’s independent auditor in April 2009 after disclosing “material weaknesses” in American Apparel’s internal control over financial reporting.

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

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

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60. In a press release dated April 1, 2011, the Company also revealed that

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Lion Capital, a private investment fund that loaned the Company $80 million in

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

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simultaneously Lion Capital partners) – Lyndon Lea (“Lea”) and Neil Richardson

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(“Richardson”) – from American Apparel’s Board of Directors (the “Board”). For

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investors, Lion Capital’s belated attempt to distance itself from Defendants was too

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little, too late. After the removal of Lion Capital’s directors from the Board,

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Defendants admitted that Lea and Richardson were removed to eliminate “conflicts

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of interest” created by Lion Capital’s role as a lender and creditor to the Company

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during the Class Period.

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61. Finally, in addition to former CFO Ken Cieply, who resigned from the

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Company in 2008, and Deloitte’s noisy withdrawal in July 2010, American Apparel

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

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Period, including:

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• Keith Miller, a member of the Company’s Board, Audit Committee

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and Chairman of the Compensation Committee during the Class Period

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resigned on May 2, 2011, publicly lamenting the “ erosion ” Charney’s

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conduct had caused the Company’s shareholders.

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• Audit Committee members Mark Samson and Mark Thorton resigned

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on July 1, 2011.

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• Tom Casey, Acting President of American Apparel who was hired in

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October 2010 “to validate the Company’s strategy, improve operating

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disciplines and optimize the capital structure,” resigned a short time

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

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• Marty Staff (Chief Business Development Officer), who was

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personally hired by Charney, resigned in October 2011, stating that

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“Dov [Charney] is a one-man band, and I don’t think I realized how

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singular that vision is. When I joined, I don’t think I realized how

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

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

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

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62. Mr. Staff’s perspectives on Charney’s singular control over the

9 Company’s operations were most recently described on December 22, 2011, when

10 the Company itself was required to issue an unprecedented press release on Form 8-

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K explaining that “[l]ast week, an article appeared in a trade publication that

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

13 attributed to our Chief Executive Officer . Consistent with the Company’s policy

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

15 Company hereby disclaims such estimates and cautions that no reliance should

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

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warning the Company’s shareholders not to rely on Charney’s public statements.

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Charney may be one of “fashion’s leading innovators,” but, as alleged herein, he is

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

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JURISDICTION AND VENUE

21 63. The claims asserted herein arise under and pursuant to §§10(b) and 22 20(a) of the Exchange Act, (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 23 promulgated thereunder (17 C.F.R. §240.10b-5). 24 64. This Court has jurisdiction over the subject matter of this action 25 pursuant to §27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. §1331. 26 65. Venue is proper in this District pursuant to §27 of the Exchange Act, 27 15 U.S.C. §78aa and 28 U.S.C. §1391(b). Many of the acts and transactions alleged 28

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herein, including the preparation and dissemination of materially false and

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

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American Apparel’s principal executive offices are located within this District.

4

66. In connection with the acts, conduct and other wrongs alleged in this

5

Complaint, Defendants, directly or indirectly, used the means and instrumentalities

6

of interstate commerce. THE PARTIES

7

8 67. Lead Plaintiff, Charles Rendelman, as detailed in the Certification of

9 Named Plaintiff attached to his motion for appointment of lead plaintiff filed on

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

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

12 damaged thereby.

13 68. Defendant American Apparel is a Delaware corporation with its

14 principal executive offices located at 747 Warehouse Street, Los Angeles,

15 California 90021.

16 69. Defendant Charney was, at all relevant times, the Company’s

17 President, CEO, and Chairman of the Board. Charney also served as the President,

18 CEO, director and founder of American Apparel’s predecessor, Old American

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

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

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

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

23 (“3Q08 10-Q”); the 2008 Annual Report; the April 29, 2009 Proxy Statement; the

24 June 30, 2009 Form 8-K; the August 13, 2009 Form 10-Q (“1Q09 10-Q”); the

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

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

27 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:

I have reviewed this quarterly report on Form 10-Q of America Apparel, Inc.

2. Based on my knowledge, this report does not contain any untrue

statement of a material fact or omit to state a material fact necessary

to make the statements made, in light of the circumstances under which 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 material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for

establishing and maintaining disclosure controls and procedures (as

defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules

13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such

disclosure controls and procedures to be designed under our

supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period

in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused

such internal control over financial reporting to be designed under

our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial

statements for external purposes in accordance with generally

accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about

the effectiveness of the disclosure controls and procedures, as of

the end of the period covered by this report based on such

evaluation; and

d) Disclosed in this report any change in the registrant’s internal

control over financial reporting that occurred during the

registrant’s most recent fiscal quarter (the registrant’s fourth

fiscal quarter in the case of an annual report) that has materially

affected, or is reasonably likely to materially affect, the

29


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2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

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21

22

23

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registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based

on our most recent evaluation of internal control over financial

reporting, to the registrant’s auditors and the audit committee of the

registrant’s 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 are reasonably likely to adversely affect the registrant’s ability to

record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or

other employees who have a significant role in the registrant’s internal control over financial reporting.

71. Defendant Kowalewski was, at relevant times, the Company’s

Executive Vice President and CFO, as well as a Director. Kowalewski served as

the Company’s 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 signed

Certifications 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 to

hereinafter 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 Apparel’s 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 Company’s

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

30


#:2129

1

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

2

them to be corrected.

3

73. By reason of their positions as officers and directors of American

4

Apparel and because of their ability to control the business and corporate affairs of

5 the Company, the Individual Defendants owed American Apparel shareholders an

6

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

7

Individual Defendants had a duty to promptly disseminate accurate and truthful

8

information with respect to the Company’s operations, finances and compensation

9

practices. The Individual Defendants substantially participated in the issuance

10

and/or review of the false and/or misleading statements alleged herein, including

11

the false SEC filings and reports issued to American Apparel shareholders. The

12

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

13

American Apparel’s Proxy Statements, quarterly reports, press releases, SEC filings

14

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

15

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

16

74. The Individual Defendants were aware of their obligations to comply

17

with applicable laws and to disclose the truth about American Apparel because such

18

requirements are detailed in American Apparel’s own Code of Ethics (“Code”).

19

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

20

adopted this code of ethics (the ‘Code’), which is applicable to all directors, officers

21

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

22

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

23

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

24 to maintain a high standard of accuracy and completeness in the Company’s

25

financial records and other business-related information and data.”

26

75. The Individual Defendants knowingly violated these internal policies

27 because, under the Code, “the Chief Executive Officer and Chief Financial

28

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#:2130

1

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

2

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

3

of the Company must familiarize himself or herself with the disclosure

4

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

5

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

6

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

7 whether within or outside the Company, including to the Company’s independent

8

auditors , governmental regulators, self-regulating organizations and other

9

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

10

February 2010 monthly financial statements until after the filing of the 2009 10-K

11

and made related misrepresentations” to Deloitte.

12

76. Defendants violated these Company, Generally Accepted Accounting

13 Principles (“GAAP”) and SEC mandates by making false and misleading

14

statements and omissions in American Apparel’s financial statements regarding the

15

Company’s compliance with immigration laws, the effect of its immigration law

16

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

17

reckless in not knowing, that facts indicating that all of the Company’s interim

18

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

19

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

20

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

21

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

22

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

23 Lion Capital

24

77. Lion Capital is a limited liability partnership with various investment

25

funds incorporated in England where its registered office is located at 21 Grosvenor

26

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

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

28

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#:2131

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

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

3

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

4 were simultaneously partners of Lion Capital and members of American Apparel’s

5

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

6

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

7 American Apparel and the Individual Defendants.

8

CONFIDENTIAL WITNESSES

9

Confidential Witness 1

10

78. CW1 was employed at American Apparel for five and a half years

11 prior to CW1’s departure from the Company in May 2010. CW1 began as a

12

Customer Service Representative, and was later promoted to Supervisor in

13 Customer Service. CW1 sat on the seventh floor of the Company’s downtown

14

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

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

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

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

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

19 employees to provide proper employment documentation. CW1 knew three people

20

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

21

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

22

June 2009.

23


24

79. CW2 was a Manufacturing Division Controller for American Apparel

25 from 2008 through mid-2010. CW2 reported to Corporate Controller Adrian Taylor

26

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

27

recording the financial transactions and compiling the financial statements for the

28

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#:2132

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

2 Taylor, who was responsible for consolidating the information with the Company’s

3

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

4

for the entire Company. CW2 believes that it was Taylor’s responsibility to inform

5

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

6

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

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

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

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

10

forwarded this information to corporate, or Taylor.

11

80. CW2 monitored the manufacturing division’s employee headcount to

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

13

dismissals of American Apparel’s manufacturing employees was evident at the

14 Company in 4Q09. The dismissals impacted the Company’s operations with

15

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

16

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

17 double the number of employees in manufacturing positions. The replacement

18

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

19

Company’s financial records in July or August 2009 reflected that, while payroll

20

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

21

Company’s bloated expenses.

22

81. According to CW2, American Apparel experienced great difficulty

23

replacing the workers it lost and, by the time CW2 left the Company in June 2010,

24

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

25

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

26

the significant impact caused by the dismissal of manufacturing workers because

27

Charney was heavily involved in every aspect of American Apparel’s operations.

28

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#:2133

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82. As a result of the negative impact the workforce reductions had on the

2 Company’s costs, the Company began running afoul of debt covenants in the last

3

quarter of 2009 and the first quarter of 2010. Because the Company’s debt

4

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

5 lenders monitored American Apparel’s GOP. The Company calculated its GOP

6 monthly at the corporate level and American Apparel executives closely monitored

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

8

one of Kowalewski’s key responsibilities. According to CW2, there was a panic at

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

10 because the Company’s GOP fell below the lenders’ requirements.

11


12

83. CW3, a Distribution/Returns Supervisor from August 2009 through

13

early 2010, reported to Zoreida Candelerio (“Candelerio”) (American Apparel’s

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

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

16

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

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

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

19

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

20

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

21

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

22

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

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

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

25

terminated workers in the returns department.

26

27

28

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2

84. CW4 was a Production Scheduler from June 2009 through June 2010,

3 who extracted information from American Apparel’s AX system, and incorporated

4

the information into Microsoft Excel spreadsheets in order to determine which

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

6

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

7 American Apparel under different names.

8


9

85. CW5 was a Resource Assignor in American Apparel’s Production and

10 Planning Department from November 2007 until the beginning of 2010. According

11 to CW5, it was common knowledge within the Company that American Apparel

12 employed undocumented workers. American Apparel’s Human Resources

13 Department coached job applicants who did not have proper work documentation

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

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

16

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

17 different last name. CW5 knew about the individual’s name change because e-mail

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

19

86. The workforce reduction due to the ICE investigation in mid-2009

20

negatively affected production because the employees hired to replace the

21 undocumented workers were inexperienced and could not perform their jobs as

22

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

23 much as the employees who were terminated. CW5’s assertion that the workforce

24 reduction affected production was based on the Company’s delay in bringing

25

certain clothing styles to market.

26

27

28

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2

87. CW6, who was a former employee in American Apparel’s Bundling

3

Section from April 2009 through March 2010, stated that the majority of

4 manufacturing personnel employed at American Apparel lacked the necessary

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

6 employees in CW6’s department who did not have proper documentation. Even

7 CW6’s manager was terminated as a result of the ICE inspection but, one month

8

after he was terminated, the manager was rehired.

9 Confidential Witness 7

10

88. CW7 was a Payroll Administrator at the Company’s corporate

11 headquarters in Los Angeles from 2003 through December 2008, and was

12

responsible for payroll for all domestic retail store employees and corporate

13

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

14

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

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

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

17

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

18

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

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

20 ADP. According to CW7, ADP did not manage the Company’s factory workers’

21

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

22

corporate headquarters were responsible for hiring and issuing paychecks to factory

23

employees.

24 Confidential Witness 8

25

89. CW8 held various positions during his/her employment at American

26 Apparel from late 2005 through mid 2008. From mid 2008 through December

27 2010, CW8 served as a Logistics Manager in the Company’s Los Angeles

28

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#:2136

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

2

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

3

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

4

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

5 Warehouse and Distribution Manager Candelario, who was primarily responsible

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

7 that Company employees on the fifth floor of Company headquarters handled

8 payroll for warehouse and factory employees.

9

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

10

Company’s international subsidiaries and retrieved sales information from

11

American Apparel’s ERP system to incorporate this information into a monthly

12 report that broke down sales by subsidiary. CW8 believed the Company’s

13

inventory tracking system modules communicated well together, thus enabling

14 American Apparel to monitor exactly what type of inventory it had on hand.

15

91. According to CW8, the retail operations department compiled and

16

circulated a daily sales report every morning, which provided the previous day’s

17

sales broken down by retail store. The daily sales report also included the previous

18

seven days’ sales and compared the previous day’s sales year-over-year. The daily

19

sales report was e-mailed to a large distribution list, which included Charney,

20 Kowalewski, certain Board members, department heads and individuals in the

21

accounting department. The accounting department also generated and distributed a

22

daily report that listed the Company’s inventory, raw materials, sales and expenses

23

for the previous day. The daily accounting report was circulated to the same

24

distribution list as the daily sales report, which included both Charney and

25 Kowalewski.

26

27

28

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2

92. CW9 worked in American Apparel’s Human Resources Department

3 from mid-2006 through January 2010. CW9 reported to Director of Human

4 Resources Kristina Moreno and Retail Director Nicole Gabbay (“Gabbay”).

5 Moreno reported to Bailey or Charney. Gabbay reported directly to and worked

6 closely with Charney. Moreno oversaw human resources for both retail and

7 manufacturing and, except for a common manager, these groups were separate.

8 After Moreno’s departure, the Manufacturing Division Human Resources

9

Department reported directly to Bailey.

10

93. According to CW9, the Company learned of the upcoming ICE I-9

11

audit well in advance of the formal November 29, 2007 Inspection Notice. In fall

12

2007, CW9 was directed to begin gathering Forms I-9 for the Company’s retail

13

employees. While Moreno instructed CW9 in the preparation for the I-9 audit,

14 CW9 believed Moreno received directions from or conferred with Crucillo and

15

Charney regarding the audit. CW9 was instructed to make sure all Forms I-9 were

16

filled out correctly and that the employee supplied the necessary supporting

17

documentation.

18

94. Leading up to the I-9 audit, Manufacturing Division Human Resources

19 Department employees gathered manufacturing employees’ Forms I-9. During this

20 time, CW9 spoke with Manufacturing Division Human Resources Department

21

employee Alejandra Flores (“Flores”), who explained that in the process of

22 preparing for the inspection she examined so many documents in succession that it

23

was becoming evident when a document was a fake. Flores illustrated this by

24 showing CW9 copies of numerous social security cards and compared them to one

25 they knew was authentic. According to CW9, it was easy to identify which ones

26 were fake. The Manufacturing Division Human Resources Department was finding

27 that there were a number of employees using fake documents. According to CW9,

28

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#:2138

1 Moreno and Bailey would have been updating Charney regularly through the

2

Company’s I-9 review process. In addition, in CW9’s experience, Charney would

3 have also been updated on the false documents the Manufacturing Division Human

4 Resources Department employees were finding during the review.

5


6

95. From August 2006 through approximately March 2008, CW10 served

7

as Executive Assistant to Moreno. In addition to assisting Moreno, CW10 worked

8 on various Human Resources Department projects for manufacturing employees.

9 According to CW10, Moreno left the Company in December 2007. Since the

10 Company did not replace Moreno, after Moreno’s departure, the Human Resources

11

Department employees reported directly to Bailey.

12

96. According to CW10, Flores and another human resources employee

13 handled most of the manufacturing employee hiring but CW10 filled out Forms I-9

14 and W-2 for newly hired manufacturing employees. When filling out a Form I-9,

15

the employees provided identification documentation required pursuant to the Form

16

I-9. CW10 made photocopies of the identification used by the employee and

17

transferred information about the identification onto the Form I-9. According to

18 CW10, the Company did not use a machine or system to confirm or authenticate

19 identification provided by employees. CW10 previously worked for a company

20 that utilized E-Verify, which CW10 said would answer any questions or doubts

21

about an employee’s eligibility to work in the United States.

22

97. CW10 believed that a lot of the identification presented to him/her was

23

not authentic and, consequently, CW10 asked superiors how to confirm the

24

identification’s validity. Moreno, Bailey and other co-workers responded, “we

25

aren’t the IRS.” CW10 asked his/her superiors for guidance because the Forms I-9

26

requires the employer to certify under penalty of perjury that the documents

27

appeared authentic. As a result, when CW10 doubted the authenticity of documents

28

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#:2139

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presented in support of employees’ Forms I-9, CW10 refused to sign the Forms I-9

2

and instead gave them to Flores or another human resources employee to sign.

3

CW10 also believes that it was known internally that the Company hired

4 undocumented workers who were not eligible for employment. CW10 felt this was

5 the case because of the I-9 instructions he/she received about accepting

6 documentation from employees at face value.

7

98. According to CW10, the Company spent approximately three months

8 preparing employee Forms I-9 for the audit. During November and December

9

2007, the preparation took on additional urgency, and, as a result, the Human

10 Resources Department worked full time in an attempt to ready the Company for the

11

audit. During this period, the Company also assigned additional employees to work

12

on the audit preparation. In the weeks leading up to the audit, CW10 and his/her

13

co-workers worked extended hours, typically working from 8:00 a.m. to 10:00 p.m.

14

99. Moreno instructed the employees preparing for the audit to confirm

15

that there was a Form I-9 for every employee, review it to make sure it was

16

completed correctly and ensure that there were copies of the accompanying

17 documentation. Moreno was especially focused on making sure no supporting

18

documents were expired. However, the most frequently occurring issue discovered

19

in this preparation was expired documentation. Additionally, many of the

20

employees’ Forms I-9 lacked supporting documentation, were completed

21

incorrectly or only partially completed. When employees were approached about

22 providing missing information or documentation, they typically did not return to

23 work.

24

100. CW10’s supervisors instructed employees preparing for the audit to

25

attempt to fix the partially completed Forms I-9 and, for Forms I-9 not signed

26

within the three day limit, by inserting a date within three days of the employee’s

27

hire date. In other words, they were instructed to forge the dates on the Forms I-9.

28

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#:2140

1

According to CW10, it would have been easy to forge copies of Forms I-9, but ICE

2

requested originals, which were more difficult to forge, because some of the copies

3

were unreadable. It was also obvious that a number of inauthentic documents

4

accompanied the employees’ Forms I-9. Many alien ID cards were inauthentic

5

because the cards had less than the required nine numbers. Flores typically updated

6 Moreno and Bailey on the progress of the review and the reviewers’ findings. The

7 reviewers provided Bailey with feedback on the review and what they were finding.

8

On separate occasions, CW10 specifically mentioned to Bailey and his assistant,

9 Janet Torres (“Torres”), that the Company had many issues with fake documents.

10


11

101. CW11 was a former quality assurance employee at the Company from

12

2003 to 2010. CW11 was responsible for conducting quality control inspections of

13

the cutting floor and the quality assurance lab and reported to Bailey. CW11’s

14 position required him/her to be on the manufacturing floor, where he/she inspected

15 completed products. While on the manufacturing floor and when conducting

16 inspections, CW11 observed that new employees were producing fewer products

17

than the employees laid off as a result of the ICE inspection. While conducting

18

inspections, CW11 observed a decrease in the quantity of completed products ( i.e. ,

19

decreased production volume) as the laid off employees were being replaced.

20

Further, after the layoffs, product quality also was negatively affected. Prior to the

21

ICE inspection layoffs, the defect rate in completed products was approximately

22 two to three percent; however, when the laid off employees were replaced, the

23

defect rate may have risen up to eight percent.

24

102. The decrease in quantity and the increased defect rate were

25

documented in a Quality Control system, as well as Quality Control reports which

26

Bailey received. The decrease in production and the increase in defects were a

27 result of a substantial number of employees, who had worked at the Company for

28

42


#:2141

1

many years, being laid off. Sewing is muscle memory, and experience matters, thus

2 when the laid off employees were replaced, it took some time for the new

3

employees to get up to speed. The majority of CW11’s staff, with whom he/she had

4

worked for years, was laid off as a result of the inspection. This aggravated CW11,

5 because he/she would have to train new Quality Control employees overnight.

6 CW11 believed that employees who were laid off as a result of the inspection may

7

have been rehired. In his/her opinion, around the time of the ICE inspection, there

8 were instances when CW11 noticed employees, whom he/she had not seen for a

9 period of time, suddenly reappear at the Company.

10


11

103. CW12 was a contract cost accountant for American Apparel from

12 December 2007 to March 2008 and assisted in American Apparel’s year-end close,

13 as well as with the Company’s 2007 Annual Report. CW12 worked directly with

14 Kowalewski and had direct interaction with Charney and Bailey. CW12 recalled

15

attending several internal conference calls and recalled that Charney argued with

16

Cieply and American Apparel’s outside auditors, Marcum, regarding how to record

17

costs. Charney wanted to write off certain expenses and, when Marcum said that

18

such write-offs were not GAAP compliant, Charney reacted angrily. In addition,

19 according to CW12, American Apparel was not properly tracking its manufacturing

20

costs for 20 to 30 percent of its items and, as a result, was underreporting costs.

21

When CW12 brought this to the attention of Bailey, Bailey reacted angrily.

22

DEFENDANTS’ FRAUDULENT SCHEME

23

104. Throughout the Class Period, Defendants: (i) represented that they

24 made “diligent efforts” to comply with labor and employment regulations, when in

25

fact they had not done so; (ii) falsely represented that many of the Company’s

26 manufacturing employees were “documented immigrants, authorized to work in the

27

United States” and that it was the “Company’s policy, and has been at all times, to

28

43


#:2142

1

fully comply with its obligations to establish the eligibility of prospective

2

employees under immigration law;” (iii) failed to disclose, and made false

3

statements concerning, the Company’s employment practices and its effect on the

4

Company’s operating costs, and gross margins and profits, including the fact that

5 the termination of one-third of the Company workforce would have no “materially

6 adverse impact” on American Apparel; and (iv) misrepresented the Company’s

7

internal and financial reporting controls and financial condition.

8 Defendants Prepare for the I-9 Audit

9

105. On March 29, 2007, ICE initiated an investigation targeting American

10 Apparel, which appeared to be unlawfully employing aliens who are unauthorized

11

to work in the United States, in violation of Title 8, United States Code, Section

12

1324a. The Company learned of the ICE investigation no later than September

13

2007 and immediately began to prepare employees’ Forms I-9 for review. Then

14 Director of Human Resources Moreno, who reported directly to Charney, oversaw

15

the preparations and received directions from, or conferred with Crucillo and

16

Charney, regarding the audit. According to CW10, Moreno instructed employees

17 preparing for the audit to confirm that there was a Form I-9 for every employee,

18

review it to make sure it was completed correctly, and ensure that there were copies

19 of the accompanying documentation.

20

106. In anticipation of the audit, Manufacturing Division Human Resources

21

Department employees reporting to Moreno gathered the employees’ Forms I-9. In

22 November and December 2007, the Human Resources Department worked full time

23 in an attempt to ready the Company for the audit. During this period, the Company

24

assigned additional employees to work on the audit preparation. In the weeks

25 leading up to the audit, CW10 and his/her co-workers worked extended hours

26 preparing for the audit, typically working from 8:00 a.m. to 10:00 p.m. CW9 was

27

instructed to confirm that all Forms I-9 were filled out correctly and that all

28

44


#:2143

1

employees had supplied the necessary supporting documentation. If there was a

2 problem with the Form I-9 or any missing documentation, CW9 was instructed to

3

correct it.

4

107. Moreno instructed employees preparing for the audit to fix any

5

partially or incorrectly completed Forms I-9 by inserting a date within three days of

6 the employee’s hire date – a mandatory immigration law requirement. According to

7 CW10, it would have been easy to forge copies of Forms I-9, but ICE requested

8

originals, which were more difficult to forge, because some of the copies were

9 unreadable. In preparing for the audit, the Company was also focused on ensuring

10

that no supporting documents were expired. The preparation, however, revealed

11

many files with expired documentation. Additionally, many of the employees’

12

Forms I-9 lacked supporting documentation, and/or were completed incorrectly or

13 only partially completed. When manufacturing employees were approached about

14

providing missing information or documentation, they typically failed to return to

15

work.

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108. It was obvious that a number of inauthentic documents accompanied

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the employees’ Forms I-9. For example, many alien ID cards had less than the

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required nine numbers. Moreno and Bailey – both direct reports to the Individual

19 Defendants – were updated on the progress of the review and the reviewers’

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findings. Bailey often came to the Human Resources Department to talk to the

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entire group working on the Forms I-9 review. The reviewers provided Bailey with

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feedback on the review and their findings. CW10 specifically told Bailey and his

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assistant, Torres, that the Company had what appeared to be fake documents.

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109. CW9 spoke with Manufacturing Division Human Resources

25 Department employee Flores, who explained that many of the documents

26 supporting the manufacturing employees’ Forms I-9 were fake. Flores showed

27 CW9 copies of numerous social security cards and compared them to ones they

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knew were authentic. The Manufacturing Division Human Resources Department

group found a number of employees with inauthentic documents. Moreno and

Bailey updated Charney regularly throughout the I-9 review process.

American Apparel Is Served With the Inspection Notice

110. On November 29, 2007, ICE served American Apparel with the formal

Inspection Notice for all current employees working at the Company’s headquarters

in Los Angeles. The Inspection Notice stated that it “serve[d] as advance notice

that ICE has scheduled a review of your forms.” In addition, it explained that

“[d]uring the review, [ICE agents] will discuss the requirements of the law and

inspect your Form I-9’s. The purpose of the review is to assess your compliance

with the provisions of the law.” The Inspection Notice expressly warned

Defendants that ICE/DHS special agents would be on site to review of all Forms I-9

for the Company’s employees.

111. At 8:30 a.m. on January 3, 2008, ICE agents visited the Company’s

headquarters and personally hand-counted the Forms I-9 in front of the Company’s

Chief Operating Officer (Bailey), in-house counsel (Crucillo) and outside counsel.

Bailey and Crucillo reported directly to Charney and Kowalewski. According to

ICE, “[d]uring that inspection, the requirements of the law were discussed and

Forms I-9 were inspected.” Despite being asked to certify ICE’s count, Crucillo

made a suspicious notation on an ICE document that “[i]nitial hand count was made

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

representative.”

112. 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. In addition to

providing 85 fewer Forms I-9 than it had workers, Defendants presented 74 Forms

I-9 for employees not on the employee list they presented to ICE. In total, ICE

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counted 128 substantive violations and 1,390 procedural violations in the Forms I-9

the Company presented for review. These violations included: (i) not providing

Forms I-9 for certain employees; (ii) failing to note whether the employee is a

“Citizen/LPR/Alien;” and (iii) failing to attest the Form I-9 within three days of

time of hire. These violations are separate and apart from ICE’s finding that

approximately 1,800 workers were not authorized to work in the United States. As

a result, as of January 3, 2008, Defendants knew that American Apparel had

committed substantive violations of federal immigration laws.

113. In addition, Defendants knew that the Company’s manufacturing

workforce was largely undocumented. According to CW1, who often worked

directly with Charney and Bailey, American Apparel regularly hired undocumented

workers and did not require employees to provide proper employment

documentation. Likewise, CW6 reported that the majority of the Company’s

manufacturing personnel lacked the necessary papers to work legally in the U.S.

CW5 stated that it was common knowledge within the Company that American

Apparel hired undocumented workers. American Apparel’s Human Resources

Department even coached job applicants who did not have proper work

documentation on what they needed to produce to get hired.

DEFENDANTS FALSE AND MISLEADING STATEMENTS

The Class Period Begins With Defendants’ Failure to Timely Disclose the Inspection Notice

114. The Class Period begins on November 28, 2007, the day the Company

filed its November 2007 Proxy which told investors that “[m]any of American

Apparel’s workers are documented immigrants , authorized to work in the United

States .” This statement was false and misleading because Defendants had, for over

a decade, knowingly employed thousands of undocumented workers at the

Company’s Los Angeles garment factory. Defendants’ statement was especially

misleading because the November 2007 Proxy highlighted that:

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Changes to existing U.S. immigration laws or labor laws could affect

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this labor force and could make it harder for members of such force to

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remain or legally work in the United States. Any changes in U.S. laws

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having such an affect could make it harder for American Apparel to

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maintain and expand its work force, which would be adverse to

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American Apparel’s manufacturing capabilities and harm American

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Apparel’s operations and financial results.

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At the time they made this risk disclosure, however, Defendants were aware that

9 American Apparel’s violations of current U.S. immigration laws were already

10 being uncovered internally, and that the Company’s negative findings would be

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confirmed by the imminent ICE audit.

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115. On December 5, 2007, the Company filed its post-effective

13

amendment to prior S-1 Registration Statement on Form S-3, which stated that the

14

“[t]he November 2007 Proxy Statement and all exhibits thereto are incorporated

15

herein by reference and we urge any potential investor in our securities to read it.”

16

This filing incorporated the same false “[m]any of American Apparel’s workers are

17 documented immigrants and authorized to work in the United States” statement

18 from the November 2007 Proxy. On December 11 and 18, 2007, the Company filed

19

press releases on Forms 8-K with details about the Endeavor acquisition. Both

20 press releases advised investors to read the November 2007 Proxy, which contained

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the false “documented immigrants” statements alleged in ¶114.

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116. On January 16, 2008, American Apparel filed a press release with the

23

SEC on Form 8-K attaching an investor power point presentation for the 10th

24 Annual ICR XChange Conference being held at the St. Regis Monarch Beach

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Resort & Spa in Dana Point, California. In the disclosures accompanying the

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presentation, Defendants listed “ inquiries and investigations and related litigation ”

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as risks. The disclosures were misleading because Defendants omitted that an

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investigation had already commenced, that an audit had already taken place, and

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that substantive immigration law violations had already been found at the

3

Company. For a January 18, 2008 New York Times article entitled “Politics

4 Wrapped in a Clothing Ad,” Charney told the New York Times that American

5

Apparel “was careful to make sure that its workers presented the necessary

6 documentation for employment.” This statement was false and misleading because,

7 at the time Charney made it, he knew that the Company employed thousands of

8 undocumented workers and that American Apparel had virtually no verification

9 systems in place to root out undocumented workers.

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117. By July 2008, ICE had finished checking the social security numbers

11

of American Apparel employees through its database. According to ICE

12 documents, most of the social security numbers were taken from Forms I-9 but, for

13

those employees for whom American Apparel failed to present Forms I-9, the social

14 security number was taken from a Form DE6. Of the 3,590 social security numbers

15 checked, ICE found that just 26% of them (925) matched the employee named.

16

118. The statements referenced above in ¶¶114-16, supra were false

17 because, at the time they were made, Defendants knew, or were reckless in not

18 knowing, that: (i) American Apparel employed 2,500 undocumented workers in a

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factory where the Individual Defendants also worked; (ii) the Company had

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virtually no verification systems in place to verify or root out undocumented

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workers; (iii) the undocumented workers were like “family” to Charney who said he

22 knew many of them for 10 years; (iv) it was common knowledge at the Company

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that it employed undocumented workers; (v) American Apparel utilized separate

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payroll departments and systems for its factory versus retail/corporate employees;

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(vi) senior management instructed human resources employees to ignore false

26 documentation; (vii) the Company had already committed substantive violations by

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failing to present Forms I-9 for 85 employees during the January 3, 2008 ICE audit;

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(viii) the Company’s preparation for the ICE audit had confirmed that many of the

Forms I-9 were false, partially completed, not dated within the required three-day

period, contained supporting documentation that was expired or clearly fake; and

(ix) when employees were asked to correct problems with their Forms I-9, they

stopped showing up for work.

Defendants Disclose the Inspection Notice

119. In March 2008, the Company’s 2007 Annual Report finally disclosed

that American Apparel had received the Inspection Notice stating, in pertinent part,

that “[i]n late 2007, American Apparel received a notice from [ICE] 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, however, continued to be misleading because Defendants failed to

also disclose the substantive violations that the Company had already committed,

based on their preparation for the audit, and that many more were likely. The 2007

Annual Report also grossly misrepresented that the “Company makes diligent

efforts to comply with all employment and labor regulations, including

immigration laws .” 11

120. On April 30, 2008, after a series of immigration enforcement raids by

the then Bush-led DHS targeting Los Angeles-area companies, American Apparel

spokesman Peter Schey publicly threatened that the Company would “come down

like a ton of bricks [on ICE and use] the courts and other devices if possible” if

American Apparel’s facilities were raided. Schey also misrepresented on the

Company’s behalf that “the company’s employees, 4,000 of whom work

downtown, were all legal to the best of his knowledge, although he said

11 The Company’s 2008 Annual Report, filed with the SEC on March 16, 2009, repeated this statement.

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immigration authorities had asked the company to provide documentation on its

workers.” 12

121. Approximately two weeks later, on May 16, 2008, Charney energized

his “Legalize LA ” project. “Legalize LA ” is an American Apparel advertising

campaign that uses the plight of undocumented workers to promote the Company’s

brand. In a letter he personally signed for the campaign dated May 16, 2008,

Charney, in answer to his own question “Why does American Apparel care about

immigration reform?” answered:

Simple answer: humanity. Self interested answer: because we do

everything in Los Angeles...and this city’s economy as a whole is

deeply dependant on immigrant labor....If these industries were forced

to move offshore...because of stepped-up enforcements, the damage to

the economy would be irreparable. But so many of these businesses

are, understandably, afraid to speak up.

122. American Apparel was not only “deeply dependant” on immigrant

labor to manufacture its garments domestically but, in an effort to unfairly highlight

the Company’s purported pro-labor/pro-employee “competitive advantages” over

other clothing retail brands, Defendants lied to shareholders about the Company’s

large undocumented workforce. When Charney earlier admitted to WWD on April

11, 2006, “‘[f]or anyone in the apparel industry not to get behind some form of

legalization for these [undocumented] workers is to not support the people within

your own industry....It’s to cut your nose off to spite your face,’” he was not merely

espousing a personal opinion – he was talking about his own Company.

123. Defendants also knew that, as a vertically-integrated clothing retailer,

manufacturer and distributor, the Company would have grave difficulty filling low-

12 Ultimately, the Company’s threat was an empty one. Neither Schey nor anyone else at American Apparel came down “like a ton of bricks” or otherwise on ICE after the terminations.

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skilled sewing positions with U.S. citizens or other documented workers. Charney

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himself earlier admitted in the Los Angeles Times on April 20, 2006, “‘I think over

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50% of the workers in my industry are falsely documented.’” Given the foregoing,

4 one would have expected (as investors did) that Defendants had implemented strong

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verification systems to ensure that the Company was diligently complying with U.S.

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federal immigration laws (see ¶16, supra). Defendants not only failed to do so,

7 they, instead, knowingly hired undocumented workers.

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124. As the I-9 audit intensified, on March 16, 2009, the Company filed its

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2008 Annual Report which falsely represented that “[i]n January 2008, American

10 Apparel provided ICE with access to the requested forms. American Apparel has

11 not had any further communications with ICE since this request was fulfilled .”

12

Yet, for over 18 months following the January 3, 2008 I-9 audit, Defendants were in

13

constant communication with ICE about the inspection, and were receiving regular

14 updates regarding ICE’s negative findings. In a July 3, 2009 New York Times

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article entitled “A New Strategy on Illicit Work by Immigrants,” Schey himself

16 acknowledged that there had been “ discussions over 18 months between federal

17 officials and American Apparel, after immigration agents first inspected the

18 company’s files in January 2008 .”

19

125. By April 2009, it was becoming increasingly clear that the Obama

20

administration would not grant amnesty for undocumented immigrants. Instead, the

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Obama administration sought to enforce existing immigration laws by focusing on

22 employers who knowingly hired undocumented workers – rather than targeting the

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workers themselves through harsh immigration raids, arrests and deportations. On

24 April 30, 2009, Marcy M. Forman, then DHS Director of Office of Investigations

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for ICE sent an internal memo to the Assistant Director, Deputy Assistant Directors

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and Special Agents in Charge articulating President Obama’s new strategy:

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An effective strategy must do all of the following: 1) penalize

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employers who knowingly hire illegal workers ; 2) deter employers

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who are tempted to hire illegal workers; and 3) encourage all

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employers to take advantage of well-crafted compliance tools.

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126. Only a few months after the Obama administration announced its

6

policy shift, and a year and a half after the I-9 audit started, ICE served a Notice of

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Intent to Fine, Notice of Suspect Documents and Notice of Discrepancies on

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American Apparel. The Notice of Intent to Fine was for $149,490 and listed

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violations, including: (i) failure to properly complete section 2 of Form I-9 for 347

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employees ($114,510); (ii) failure to ensure employee properly completes section 1

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of Form I-9 for 21 employees ($6,930); and (iii) no Form I-9 for 85 employees

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($28,050).

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127. The Notice of Suspect Documents informed American Apparel that

14

2,383 of its employees are considered by ICE “not to be authorized to work in the

15

United States.” ICE ultimately concluded that:

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. “A review of the Forms I-9 for the American Apparel current

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employees showed that...[a] total of 1946 employees or 85% out of

18

2,293, were using Alien Registration numbers that did not allow

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them to work in the United States and made them unauthorized to be

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in the United States .”

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. “American Apparel committed substantive verification violations on

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322 of the Forms I-9 of the current employees. This included failing to

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present 85 Forms I-9 for employees listed on the payroll. American

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Apparel demonstrated by committing the 322 substantive verification

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violations that completing the Forms I-9 properly was not a priority

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for their company .”

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“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 .”

. “American Apparel USA, LLC has a workforce in which a large

percent of their workforce are lacking work authorization status and

are unauthorized to be in the United States .”

Defendants Partially Reveal the Truth About Their Large Undocumented Workforce

128. On June 30, 2009, the Company filed a Form 8-K with the SEC,

signed by Charney, which stated:

On June 24, 2009, ICE notified the Company that it was unable to

verify the employment eligibility of approximately 200 current

employees because of discrepancies in these employees’ records.

Additionally, ICE notified the Company that another approximately

1,600 current employees appear not to be authorized to work in the

United States and appear to have obtained employment by providing,

on Form I-9, documentation which ICE believes, based on its

proprietary databases, to be suspect and not valid.

129. On July 1, 2009, the Company issued a press release on Form 8-K

entitled “American Apparel Announces Developments Regarding Inspection by

U.S. Immigration and Customs Enforcement.” The press release revealed that

many of the targeted undocumented workers had “worked at American Apparel for

as long as a decade ,” confirming that the Company had long failed to comply with

immigration laws and that Charney knew many of these employees personally . The

release also falsely reiterated that the loss of these workers, who Charney knew so

well that he referred to them as “family,” would not materially impact the Company

because “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

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significant backlog of active job applications .” The June 30, 2009 press release

also falsely represented that it “is the Company’s policy, and has been at all times ,

to fully comply with its obligations to establish the employment eligibility of

prospective employees under immigration laws .” This statement was false for the

same reasons set forth in ¶118.

130. On July 2, 2009, the New York Post reported that the Company’s

immigration compliance failure was “an embarrassment for the racy retail chain’s

controversial CEO Dov Charney, who has long portrayed himself as a champion of

immigration reform,” and that “the retailer’s legal team scrambled to explain the

colossal mess.” The same day, the Los Angeles Times reported that a spokeswoman

for ICE commented that, “‘[c]learly, if there is widespread use of Social Security

numbers that either are not real or belong to someone other than the person named,

we have concerns about possibly a scheme to avoid immigration law....They

[American Apparel] are going to be fined no matter what. What’s in question now

is the amount of the fine.’”

131. As a result of these partial disclosures, half-truths and omissions, the

Company’s stock price fell 16% between June 30, 2009 and July 2, 2009 on heavy

trading volume. On July 3, 2009, the New York Times reported that Matt Chandler,

a spokesman for the DHS, commented that the ICE action at American Apparel

“underscore[s] our commitment to targeting employers that cultivate illegal work

forces by knowingly hiring and exploiting illegal workers.” 13 Undeterred,

Defendants downplayed the financial effects of their immigration law violations.

13 On September 30, 2009, Congressman Brian P. Bilbray condemned the Company for the ICE fiasco, stating that American Apparel had “‘become addicted to illegal labor’” and “‘[t]hey seem to think that somehow the law doesn’t matter, that crossing the line from legal to illegal is not a big deal.’”

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Defendants Make False and Misleading Statements and Omissions About the Effects of the Terminations

132. Unable to further conceal their U.S. immigration law violations,

Defendants changed tactics, falsely telling investors that the impending loss of

thousands of the Company’s most important workers would likely have “no

material impact” on the Company’s financial results. In the Company’s June 30,

2009 press release, Defendants represented that:

However, 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 ....The Company

believes that its current surplus levels of inventory and

manufacturing capacity will mitigate the adverse impact of any

disruption to its manufacturing activities that may potentially result

from the loss of these employees.

133. Defendants repeated this deliberately false statement in: (i) a press

release on Form 8-K dated July 1, 2009; (ii) a conference call on August 13, 2009;

(iii) an interview with the Los Angeles Times published on September 3, 2009; and

(iv) on a November 10, 2009 earnings conference call. On July 2, 2009 the Los

Angeles Times quoted Todd Slater from Lazard Capital Markets who stated that,

based on the Company’s statements, the terminations “[s]hould have no impact on

earnings.”

134. Charney, however, knew that hiring and training new factory workers

was a laborious and time-consuming process and that the disruptions associated

with losing 2,500 of approximately 3,500 of the Company’s most skilled factory

workers had resulted in both immediate increased labor costs and slower

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1 productions. CW3 confirmed that the terminated workers worked at a much faster

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pace than their replacements and that it was ridiculous for Charney to suggest that

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

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following the loss of the undocumented workers. CW5 similarly stated that the

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workforce reduction negatively affected production because the employees hired to

6 replace the undocumented workers were inexperienced and could not perform their

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jobs as efficiently.

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135. CW5 estimated that the new employees were only producing half as

9 much as the employees who were terminated in 3Q09 and 4Q09. The workforce

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inefficiencies resulted in a delay in the Company’s bringing clothing styles to the

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market. For example, in September 2009, American Apparel was still putting out

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swimwear and summer attire. These facts did not escape Defendants’ notice.

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CW11, like Charney, conducted regular inspections of the manufacturing floor

14 where CW11 observed a decrease in both the quantity and the quality of the

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completed products after the employees were lost as a result of the ICE

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investigation. Specifically, prior to the ICE inspection lay-offs in 3Q09 and 4Q09,

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the defect rate in completed products was approximately two to three percent. After

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the undocumented employees left, the defect rate rose to eight percent. These

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decreases were documented in a Quality Control system, as well as in Quality

20

Control reports regularly received by Bailey – who, in turn, reported directly to the

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Individual Defendants.

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136. Defendants were also aware that American Apparel’s costs had

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increased due to its efforts to quickly replace the lost employees. There was a mad

24 rush to hire replacement employees, which resulted in almost double the number of

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employees in the manufacturing positions. Indeed, before the Company first began

26 terminating workers in 3Q09, the Company preemptively doubled-up on

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manufacturing employees to try to stem the anticipated disruptions. According to

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CW2, in June 2009, Defendants doubled-up on workers by having two individuals

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

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Company’s costs to rise substantially. CW2 confirms that between June 2009 and

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September 2009, American Apparel’s financial reports showed increased payroll

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and decreased revenues.

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137. Defendants also received constant updates regarding the Company’s

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costs and inventory levels and, were aware of the cost increases, decreases in

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production efficiency, and the faltering quality and quantity of the Company’s

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output. The Company tracked purchasing, production, sales and accounts payable

10 through its ERP system, AX. AX also tracked inventory and the value of inventory.

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Each month the financial transactions and statements for each of American

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Apparel’s divisions were compiled. Corporate Controller Adrian Taylor also

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informed Kowalewski of any significant variances in the divisions’ financials.

14

138. According to CW8, American Apparel’s retail operations department

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compiled and circulated a daily sales report that provided the previous day’s sales,

16 broken down by store. Moreover, the Company’s accounting department generated

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a daily report that listed American Apparel’s inventory, raw materials, sales and

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expenses for the previous day. Both reports were e-mailed, each day, to Charney

19 and Kowalewski, among others. In addition, CW2 reported that American Apparel

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had great difficulty replacing the workers it lost and, by the time CW2 left the

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Company in June 2010, it still had not replaced all of the terminated workers. CW3

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also confirmed that American Apparel had difficulty hiring, and never fully

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replaced, the terminated workers in the returns department. These facts stand in

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stark contrast to the Company’s July 1, 2009 statement ( see ¶¶34, 129, supra), in a

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press release on Form 8-K, that the workers could be easily replaced and that the

26 Company “would only need to hire for a fraction of those employees that would be

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139. The Company’s difficulty in hiring new manufacturing employees, its

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desperation to get its highly skilled workers back, and Defendants’ willingness to

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violate immigration laws is best evidenced by the fact that the Company began

4 rehiring the workers that it had been forced to let go. According to CW4, many

5 employees who were dismissed after failing to produce proper ICE documentation

6 were later rehired by American Apparel under different names. CW5 confirms that

7 a cutting floor employee who stopped working for American Apparel during the

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

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a different last name. Likewise, CW6’s manager was terminated as a result of the

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ICE inspection but, one month later, was rehired. CW11 corroborated that

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employees laid off as a result of the inspection were also later rehired.

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140. In the midst of all of these disruptions, on August 13, 2009, the

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Company held an earnings conference call with analysts and investors. During the

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call, the following exchange took place:

15

[Analyst]: Could you give us a quick update on the status of

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production, particularly given some of the immigration issues that

17 you suffered from? Did you see any disruption? And what were the

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expenses in the quarter associated with that?

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[Kowalewski]: Well, given that we received an updated

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communication from ICE towards the end of the quarter, this would

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have had no financial impact on the second quarter .

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[Analyst]: Got you. But your guidance does embed some type of – I

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guess maybe if you could just give an update on what impact you’ve

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seen, I guess quarter to date.

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[Kowalewski]: When we disclosed the ICE notice on July 1, [2009] we

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indicated that at the time, despite the fact that it was difficult to

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estimate what the impact would be on our results, we didn’t believe it

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would have a material impact, given the fact that we had effectively

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hired significant amounts of people at the end of Q2 ‘08.

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And so, with the decline, also, we were in a situation where we had

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more labor than was really justified by the amount of business or unit

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volume that we were seeing. So by – if we were forced to reduce our

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workforce, the way we would mitigate that would be by increasing the

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days per week of our employees on the selling floor; so that would

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virtually pick up all of the reduction in labor that we might see if we

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had a loss in workers .

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I think at this point, we don’t have an update on what the financial

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impact would be. I think we would basically just reiterate what we

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said at the beginning of July, which is at this point difficult to

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estimate, but we do not believe that it’s material .

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141. On the same call, Charney stressed that, even with the loss of workers,

16 American Apparel was positioned to improve margins:

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[Analyst]: So speaking of the future...your goal still is kind of that

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double-digit operating margin?

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[Charney:] Absolutely....We are set up to do more business than we’re

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doing. We have the real estate; we have the management team – I

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mean if – we have enough infrastructure to roll an $800 million

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business in spite of the fact that we’re guiding for a smaller business.

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So when the – as the economy comes back, as we get better doing what

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we do, I feel we will get back to those double-digit margins.

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142. As the Company’s operations continued to unravel throughout 3Q09,

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Defendants’ efforts to downplay the significance of the terminations intensified.

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For instance, in a September 3, 2009 Los Angeles Times article, Schey falsely

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represented that “‘[w]e do not anticipate [the immigration violations] will have a

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significant impact on American Apparel’s productivity because of the confluence of

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several factors including the slow economy and high preexisting inventory levels .’”

4 Defendants, however, knew that the Company did not have inventory levels

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sufficient to offset the diminished efficiency resulting from the loss of its only

6 global manufacturing workforce. Indeed, on May 19, 2010, Charney later blamed

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the Company’s financial woes on a lack of inventory, stating “[t]here is a hole, in

8 my opinion, of a few hundred thousand pieces not being produced every week.”

9 On November 25, 2009, American Apparel e-mailed ICE, confirming that “all

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employees identified in the agency’s suspect and discrepancy documents lists have

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left American Apparel’s employment by failing to show up for work, resigning, or

12 being terminated, an[d] of course are no longer employed by the company.”

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American Apparel further stated that “almost all of the workers either failed to

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show for work, resigned from their jobs, or were terminated by September 2009,

15 with a smaller number being terminated by October.”

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143. On November 10, 2009, two months after almost all of the

17 undocumented workers had departed, the Company held its 3Q09 earnings

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conference call. During the call, Defendants maintained that their immigration

19 violations were not having any adverse impact on the Company. For instance,

20 Kowalewski stated, “I think what we said back in July [2009] when we had this

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issue was we didn’t think it was going to have a material impact to our financial

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results.” Kowalewski also compared the Company’s labor efficiency to the prior

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year’s, falsely stating, “I think on a year over year basis the efficiency in labor is

24 probably pretty comparable .” Charney similarly falsely described the Company’s

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transition to new workers resulting from the loss of one-third of the Company’s

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workforce as “virtually seamless .” The transition had not been “virtually

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seamless.”

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#:2160

144. The statements above in ¶¶132-33, 140-43 were false and misleading

because: (i) Defendants knew that losing 2,500 of the Company’s most skilled

employees was then harming the Company’s efficiencies; (ii) multiple confidential

witnesses corroborate that manufacturing quality and quantity had decreased

significantly and was apparent; (iii) American Apparel’s costs were skyrocketing

due to Defendants’ preemptive hiring of replacement employees; (iv) Defendants

reviewed reports that made clear to them that costs were rising and quality and

inventory were decreasing; (v) Defendants could not get new styles to their stores,

resulting in bathing suits being sent to stores in September 2009; (vi) Defendants

knew that the Company was having problems replacing the terminated workers and,

as a result, resorted to hiring previously terminated workers who still did not have

adequate documentation; (vii) Defendants, who worked in the same building as the

manufacturing facilities, saw these negative developments on a daily basis.

Defendants Begin to Disclose the Effects of the Terminations

145. On March 25, 2010, Defendants were forced to admit that the effects

of the terminations had been “substantial” and that the “extended disruption on [the

Company’s] operations has been unprecedented.” Further, despite Charney’s

statements that production efficiency at the Company had been unaffected, Charney

later admitted to The Globe and Mail after the Class Period on October 29, 2010

that, “‘[the immigration violations] broke our efficiencies and generated a situation

where we were late delivering garments. It lost us an enormous amount of

money .’” A March 25, 2010 press release also stated that “[t]he reduction in

manufacturing efficiency was principally a result of the forced termination of over

1,500 experienced manufacturing employees in the third and fourth quarters of

2009 following the completion of the previously disclosed I-9 inspection by U.S.

Immigration and Customs Enforcement.”

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146. The same day, the Company held a conference call with analysts and

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investors where Defendants began to disclose, albeit incompletely, some of the

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adverse consequences stemming from the loss of the Company’s factory workers.

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For instance, Charney stated:

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I think there is the employee productivity, and there is factory

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productivity. The biggest problem has been employee productivity.

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Two things. One, we have a lot, we lost some of our best people.

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We’re very saddened about that, and we’re training a lot of new people

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who are becoming better and better every week that goes by.

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147. Over the next two trading days, the Company’s stock price fell 22.7% .

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The disclosure that American Apparel’s understaffed factory was its principal

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problem stood in sharp contrast to Defendants’ earlier representations that there

13 would be no need to replace most of the lost workers and the terminations would

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actually benefit the Company because of overstaffing and that, to the extent that the

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Company did need to hire new workers, there was “significant backlog” of

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applicants to fill the positions ( see ¶¶34, 39, 129, 132, 140-43, supra). On April 2,

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2010, the Los Angeles Times pointed out the contradiction, reporting that Charney

18 “initially said that business would barely be affected . He has since changed his

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tune , now saying that the personnel cuts were ‘a big setback’ to the company and

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its plans to make more sophisticated products.”

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148. On March 28, 2010, the New York Post also noted the lie in

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Defendants explanations: “[a]t the time [of the ICE announcement], the company

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said the forced firings of about 1,500 workers wouldn’t materially hurt results. But

24 there was a new tune being played last week . ‘The reduction in manufacturing

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efficiency was principally a result of the forced termination of over 1,500

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following the completion of the previously-disclosed I-9 inspection by [ICE],’

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#:2162

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Charney’s battered company said in a statement.” The article further reported that

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“American Apparel predicts its comparable-store sales will drop 10 percent in the

3 three months ending April 30. A key problem is the understaffed factory , whose

4 output has become less efficient even as it declines .”

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149. Then on May 19, 2010, the Company issued another damaging press

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release entitled “American Apparel Reports Preliminary First Quarter 2010

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Financial Results.” The Company reported a significant drop in its gross margin

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due, in part, to “reduced labor efficiency.” The Company also explained that the

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“[t]he reduction in labor efficiency was a result of the dismissal of over 1,500

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

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Enforcement.” The same day, the Company also stated that it “expects that the

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reduced manufacturing efficiency at the company’s production facilities beginning

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during the fourth quarter of 2009 could likely continue through the end of 2010, and

15 could impact the company’s financial results at least through early 2011 .”

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150. On a same-day conference call following the Company’s May 19,

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2010 press release, Charney conceded the utter absence of factory employee

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“stability” that both he and Kowalewski had touted just months earlier ( see ¶¶39,

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140-43, supra):

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We didn’t move quickly enough after we had the immigration

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

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

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to get back on our game as far as – in a way the fact that we had this

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Made in USA factory we are not getting the full benefit of it because

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actually we don’t have enough people .

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151. Upon the release of this news, shares of the Company’s stock plunged

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40.51% , to close on May 19, 2010 at $1.63 per share, on unusually heavy trading

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#:2163

volume. The Company has not held another conference call with analysts since

May 19, 2010.

Defendants Mislead Investors About their Purported Strict Business Orthodoxy

152. During the Company’s May 13, 2008 earnings conference call for

1Q08 which took place after the Wall Street Journal “loser” article appeared ( see

¶47, supra), Charney assured 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 we’re studying that and

working on that very closely.” Charney knew that American Apparel’s financial

accounting practices were anything but “strict,” and that the Company’s internal

controls were virtually non-existent. In fact, the Company’s 2010 Annual Report

later admitted that the Company lacked internal controls throughout the Class

Period (see ¶59, supra).

153. According to CW12, just months before assuring investors that

Charney claimed he was pursuing a “strict corporate orthodoxy,” Charney was

aggressively pushing the Company’s auditor – Marcum – to write off costs in

violation of GAAP. 14 The Company was not properly tracking manufacturing costs

for 20 to 30 percent of its items and, as a result, was underreporting costs. Far from

attempting to improve controls, however, when CW12 brought this to the attention

of American Apparel’s senior management, he/she was terminated.

154. During the same 1Q08 earnings call, Charney also represented that

“[w]e’re going to be making a lot of progress as far as building a world class

financial team at American Apparel.” On the Company’s August 14, 2008

earnings conference call, Charney again assured investors that the Company’s

financial accounting was moving ahead as scheduled, stating that “[o]verall our

14 Marcum left the Company on April 3, 2009.

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SOX implementation is on track with us having just completed the assessment

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phase. We are expected to demonstrate significant progress in our [remediation] of

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[deficiencies] by year-end [2008]. Since we have assessed and reported on the

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effectiveness of internal controls, we are in compliance with SOX for our full

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requirements.”

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155. On December 24, 2008, Kowalewski, sent the Company’s head of

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public relations, Ryan Holiday, a series of e-mails. In the first e-mail, Holiday

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seeks Kowalewski’s assistance responding to an upcoming (and potentially

9 damaging) news story about American Apparel. A short time later, Kowalewski

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responds to Holiday’s request saying that he did not have time to help with the story

11 because, among other things, “1. We [American Apparel] almost went bankrupt

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last Friday . I’m sorry but I was busy with that for the past several weeks . 2. I’ve

13 been sick and occupied with other company matters since Friday because we’re

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hardly out of the woods on #1 [ i.e. , bankruptcy].”

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156. American Apparel, however, had never previously publicly disclosed

16 that the Company was on the verge of bankruptcy at that point during the Class

17 Period. To the contrary, during the Company’s November 10, 2008 earnings

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conference call with investors several weeks prior, Kowalewski trumpeted the

19 Company’s financial health, claiming “[wJe’re very pleased with our financial

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results for the third quarter .” As expected, investors and analysts relied upon

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Kowalewski’s statement. On November 11, 2008, Mickey M. Schleien, an analyst

22 with Ladenburg, maintained his “Buy” rating for the Company stating that

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“yesterday evening [on the conference call], APP reported operating results a bit

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better than expected.”

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157. And, only a short time after Kowalewski’s December 24, 2008

26 bankruptcy e-mail, the Company held a January 14, 2009 conference call with

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investors where Kowalewski said “I think if you look at our leverage statistics, we

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#:2165

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have a manageable level of debt[,]” without making any reference to the

Company’s liquidity issues. CW1, who often worked directly with Charney and

Bailey, learned in late 2008 that the Company was close to filing for bankruptcy.

This corroborates that Kowalewski – the Company’s CFO – must have believed

that the Company almost went bankrupt in December 2008 when he sent the e-mail

to Ryan Holiday that same month.

The Market Responds Favorably to Defendants’ Misleading Statements and Omissions About Their Business Practices

158. Throughout 2008 and 2009, analysts relayed Defendants’ false

messages about the Company’s internal controls and “conservative” corporate

stewardship to the market. For example, the Company’s August 2008 2Q08

earnings announcement drove American Apparel’s stock price up over 25% to

$8.20 per share on August 15, 2008, on extraordinarily high volume of nearly 1.5

million shares traded. Similarly, on August 19, 2008, in response to the Company’s

2Q08 earnings results, Ladenburg analyst Mickey M. Schleien increased his price

target for the Company from $8.00 to $10.50. During the Company’s November

10, 2008 earnings conference call for 3Q08, Kowalewski again told investors that

the Company’s internal controls progress was still on track, stating, “[o]n the

Sarbanes-Oxley front, we continue to be on track and continue to expect to

demonstrate significant progress in remediating deficiencies by yearend.” 15

159. In response to the Company’s 3Q08 results, Lazard Capital Markets

analyst Todd Slater lauded Defendants, saying “congratulations. One of the few

bright real spots in this environment.” On March 17, 2009, Mr. Slater again

congratulated Defendants for the Company’s 4Q08 and overall 2008 results, stating,

“let me congratulate you for hitting numbers that you have guided to over a year

15 On January 5, 2009, it was reported that then-CFO Kowalewski sent an American Apparel executive an e-mail that the Company “almost went bankrupt last Friday.” Defendants’ lack of controls clearly extended beyond their dismal financial reporting.

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#:2166

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ago when the world was a very, very different place...you may be the only retailer

guiding to an increase in revenue in ' 09 as well as an expansion in operating

margins and an increase in earnings. You are in a pretty elite group there .”

Defendants, however, were only “bucking the trend” (as analyst Telsey Advisory

Group put it in a November 7, 2008 research report) by misleading the market about

the impact the terminations were having on the Company’s financial performance.

160. A February 23, 2009 article in trade magazine Advertising Age

described American Apparel as the “[b]est-positioned” apparel retailer in the world.

A KeyBanc report dated April 22, 2009, highlighted that the Company was

“[c]ommitted to best practices. The question was asked about what management

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 Company’s commitment to conservatism and

maintaining best practices.” In response to this news, the Company’s stock price

jumped 7.66% on April 22, 2009. To further assure investors about the Company’s

controls and financial reporting, Defendants hired Deloitte as the Company’s new

independent auditor in the spring of 2009.

Lion Capital Loans American Apparel $80 Million and Names Three Members to the Company’s Board

161. Around the same time, in a press release on Form 8-K dated March 16,

2009, American Apparel announced that it had entered into a private financing

agreement with Lion Capital for over $80 million in secured second lien notes at a

15% interest rate maturing December 31, 2013 with detachable warrants. An April

22, 2009 KeyBanc report noted that the partnership with Lion Capital “injected a

much needed level of financial discipline” and “provides capital structure [and]

increased financial acumen.” The report also said that the Lion Capital deal “may

help boost investor confidence about corporate governance at the company.” The

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#:2167

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Lion Financing Agreements gave Lion Capital the right to designate two persons to

American Apparel’s Board, in addition to something called a “Board Observer.”

As American Apparel Board members, Neil Richardson and Jacob Capps, Lion

Capital’s designees, also signed American Apparel’s false 2009 Annual Report. On

May 12, 2010, Capps, a Lion Capital Partner and American Apparel Board member

resigned from the Board, while remaining as the “Board Observer.” Lion Capital

appointed Lea to the Board to replace Capps.

162. In a press release announcing Lion Capital’s investment, Charney

unequivocally stated that “‘[t]his investment provides us with a long term solution

for our capital structure and an enhanced ability to grow our brand both

domestically and internationally over the coming years.’” In response to this

announcement, American Apparel’s stock price jumped 67.79% on March 13, 2009

to close at $2.50 per share, on high volume of over 1.9 million shares. In truth, the

Company’s financial condition was so dire that even Lion Capital’s $80 million

cash infusion could not provide a “long term solution” for the Company’s weak

balance sheet. Only a short time after Lion Capital loaned the Company $80

million, on October 1, 2010, American Apparel had to go back to Lion Capital to

restructure its credit agreement or face possible bankruptcy. 16

163. With Lion Capital’s significant financial interest in the Company and

its own partners serving on the Company’s Board, Lion Capital had the power to

control the Company’s management and policies at a critical juncture during the

Class Period. Indeed, Lion Capital’s first $80 million lifeline to American Apparel

was key to the Company’s very survival because, at the time, the Company was

16 On April 21, 2011, American Apparel again barely staved off bankruptcy when a group of Canadian investors agreed to provide the Company with up to $45 million. The investors also got warrants to buy an additional $30 million worth of shares over the subsequent six months, also at 90 cents a share. Charney agreed to contribute $700,000 of his own money to the Company. However, unlike other existing investors , whose ownership stakes will be diluted by the issuance of shares to the new investors, Charney’s prior ownership stake can be restored if the Company’s stock price rises.

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close to defaulting with MSD Capital, L.P. (“MSD”). American Apparel owed

Special Opportunity Funds Investments, an arm of MSD, $51 million.

American Apparel’s Auditor Resigns and Reports Defendants to the DOJ

164. By early 2010, as a direct result of the Company’s immigration law

violations and the significant adverse impact those violations had on its financial

performance, brand, liquidity and overall business condition, American Apparel

was in desperate need of additional financing and covenant waivers. Financing and

waivers would be much more difficult to obtain if the Company issued “going

concern” qualifications and disclosed the serious deterioration in its financial

condition. Under then-existing covenants, some of the Company’s debt

immediately came due upon the issuance of such a qualification. To cover up its

precarious financial condition, Defendants deliberately withheld this crucial adverse

financial information from Deloitte (see ¶¶51-54, supra).

165. On May 19, 2010, the Company issued an earnings press release which

warned that it was likely to be in default on June 30, 2010 and that this “would have

a material adverse impact on the Company’s operations which would result in the

need for the Company to modify its current business plan and/or curtail its

operations and could affect the Company’s ability to continue operations as a

going concern .” Deloitte, however, had just signed an audit opinion on March 31,

2010, less than two months prior to the Company’s default which failed to include

any such “going concern” language. An auditor is responsible for including such

language in their audit report if they believe it is “reasonably possible” that the

auditee will go bankrupt within 12 months of the audit financial statement date. See

PCAOB §341.02-03, The Auditors Consideration of An Entity’s Ability to Continue

as a Going Concern .

166. On July 28, 2010, the Company revealed that, effective July 22, 2010,

Deloitte had resigned as the Company’s independent public accountant, stating that

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“Deloitte advised the Company that certain information has come to Deloitte’s

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attention, that if further investigated may materially impact the reliability of either

3

its previously issued audit report or the underlying consolidated financial statements

4 for the year ended December 31, 2009 included in the Company’s 2009 Form 10-

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K.” In response to this news, American Apparel’s stock declined 14.36%, to $1.55,

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on heavy trading. Deloitte resigned because, in its own words, it was “no longer

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willing to rely on management’s representations due to Deloitte’s belief that

8 management withheld from Deloitte the February 2010 monthly financial

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statements until after the filing of the 2009 Annual Report and made related

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misrepresentations.”

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167. Analyst reaction to the news was swift and severe. A KeyBanc report

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dated July 29, 2010 stated that:

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After the close American Apparel [] filed an 8-K stating that its auditor

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Deloitte & Touche, LLP resigned effective July 22, 2010 – we move to

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NOT RATED from a BUY rating. The filing was unexpected, and

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while it does not necessarily imply any degree of misstatement, it

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certainly raises an already high risk profile....The Company replaced

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Marcum on April 3, 2009 with Deloitte & Touche – we believe in an

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effort to provide comfort to investors. However, the transition has not

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gone smoothly and the Company has missed almost every single

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subsequent SEC filing deadline . This has been in part due to the

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previous debt covenant issues, but we believe is also in part due to

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issues between APP and Deloitte...given the high degree of

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uncertainty we are unable to provide an investment opinion and step to

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the sidelines.

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168. On July 30, 2010 the New York Post observed that “Dov Charney

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continues to rip his company’s stock price to shreds” and had “ skimped on details

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in a securities filing ,” Deloitte had said that the Company’s financial statements for

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2009 may not be reliable and that it had uncovered information “that if further

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investigated may materially impact” a previous audit report as well as the retailer’s

4 2009 financial statements. That same day, WWD reported that “[m]any of

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American Apparel Inc.’s investors took the lead of Deloitte & Touche, the

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company’s accountant, and split Thursday.”

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169. Facts later revealed by Deloitte confirm that Defendants knowingly

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concealed material adverse financial information:

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Deloitte explained that its conclusion was based on the significance of

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the declines in operations and gross margin in the Company’s

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February 2010 monthly financial statement, combined with the

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January 2010 monthly financial statements , the Company’s issuance

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of revised projections in early May 2010 which reflected a significant

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decrease in the Company’s 2010 projections, and Deloitte’s

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disagreement with the Company’s conclusion that the results shown in

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the February 2010 monthly financial statements would not have

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required a revision to the Company’s projections as of the date of the

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10-K filing and the issuance of Deloitte’s reports. Deloitte further

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indicated that their decision considered their inability to perform

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additional audit procedures, their resignation as registered public

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accountants and their professional judgment that they are no longer

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willing to rely on management’s representations due to Deloitte’s

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belief that management withheld from Deloitte the February 2010

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monthly financial statements until after the filing of the 2009 10-K and

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made related misrepresentations.

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170. Then, on August 17, 2010, the last day of the Class Period, the

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#:2171

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part:

Second Quarter 2010 Financial Results.” The press release revealed, in relevant

Gross margin for the second quarter of 2010 is expected to be in the

range of 50% to 52%, as compared to 59.0% for the prior year second

quarter. Gross margin was negatively impacted by a shift in mix from

retail to wholesale net sales, which generate lower margins, and by

lower labor efficiency at the Company’s production facilities in the

second quarter of 2010 compared to the prior year period. The lower

labor efficiency was primarily a result of the hiring of over 1,600 net

new manufacturing workers during the second quarter of 2010, as well

as the impact of an increase in the mix of more complex retail styles

produced.

Loss from operations for the second quarter of 2010 is expected to be

in the range of $5 million to $7 million, as compared to income from

operations of $7.3 million in the second quarter of 2009.

* * *

The Company expects to report a substantial loss from operations and

negative cash flows from operating activities for the six months ended

June 30, 2010. Based on this, and trends occurring in the Company’s

business after the second quarter and projected for the remainder of

2010, the Company may not have sufficient liquidity necessary to

sustain operations for the next twelve months. The Company’s current

operating plan indicates that losses from operations are expected to

continue through at least the third quarter of 2010. These factors,

among others, raise substantial doubt that the Company will be able

to continue as a going concern.

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#:2172

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171. Over the next two days, as the full truth about Defendants’

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misrepresentations was finally digested by the market, American Apparel’s stock

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price declined rapidly, from $1.39 per share to just $0.75 per share on August 19,

4 2010 – a decline of over 46% on extremely heavy trading volume.

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Post-Class Period Admissions

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172. On August 18, 2010, after an interview with Charney, WWD reported

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that “Charney traced most of the current [financial] problems back to difficulties at

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the firm’s Los Angeles factory, which hired 1,600 new workers in the second

9 quarter. Last year, American Apparel dismissed workers who could not prove to

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federal authorities that they had the legal right to work in the U.S. ‘Replacing the

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workers that we lost in [our] L.A. factory was far more difficult than I anticipated,’

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he said. ‘In addition, because the consumer is battered, having the right product at

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the right time at the right place is more important than ever. But we could not

14 respond quickly enough because of our issues with the factory .’”

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173. The article further reported that, “[t]he raffish Charney...appeared to

16 run American Apparel as a perennial start-up. Along with that came a lack of

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operation discipline that has hurt the company. Craig Johnson, president of

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Customer Growth Partners, said the company has been ‘rapidly going downhill’

19 with operational problems, issues with management integrity and corporate

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governance. ‘Any one of these issues is a challenge,’ Johnson said. ‘The

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combination of two or more can be fatal. Lenders ready to pull the plug is not a

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cause of the problem, but a result.’”

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174. Then, on February 7, 2011, American Apparel filed an amendment to

24 its 2009 Annual Report with the SEC. It was the Company’s fourth such

25 amendment to its 2009 Annual Report. The amended 2009 Annual Report was

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filed to provide investors with “unaudited” financial statements for the year ended

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that, in an “Explanatory Note” for the unaudited 2009 Annual Report, Defendants’

outside counsel actually included a meaningless (yet self-serving) disclaimer that

the mere filing of the amended 2009 Annual Report was itself “not an admission

[that prior filings] included any untrue statement of a material fact or omitted to

state a material fact necessary to make the statements therein not misleading.” 17

175. In the Company’s December 21, 2010 press release on Form 8-K,

Deloitte also stated that, “[s]pecifically, 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.” These disclosures confirm

that Defendants deliberately concealed significant and material adverse information

from investors regarding the Company’s rapidly deteriorating financial position and

its risk of default – at a time when the Company was issuing purportedly clean

financial results and rosy statements about its financial condition.

176. Finally, on March 31, 2011 American Apparel filed its 2010 Annual

Report with the SEC. The 2010 Annual Report finally provided more (belated)

granularity to the Deloitte fiasco, stating, for the first time, that Deloitte’s

accusations of fraud against the Company was:

based on the significance of the declines in operations and gross

margin in the Company’s February 2010 monthly financial statement,

combined with the January 2010 monthly financial statements, the

Company’s issuance of revised projections in early May 2010 which

reflected a significant decrease in the Company’s 2010 projections,

and [Deloitte]’s disagreement with the Company’s conclusion that the

results shown in the February 2010 monthly financial statements

would not have required a revision to the Company’s projections as of

17 Of course, this paragraph was included many months after the first putative securities class action complaint against the Company was filed in this District on August 25, 2010.

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the date of the 10-K filing and the issuance of [Deloitte]’s reports.

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[Deloitte] further indicated that their decision considered their inability

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to perform additional audit procedures, their resignation as registered

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public accountants and their professional judgment that they are no

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longer willing to rely on management’s representations due to

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[Deloitte]’s belief that management withheld from [Deloitte] the

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February 2010 monthly financial statements until after the filing of the

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2009 10-K and made related misrepresentations .

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The Audit Committee and the Company’s management are currently

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evaluating these matters . The Audit Committee of the Company has

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commenced an investigation into the assertions that management

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withheld the February 2010 monthly financial statements and related

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misrepresentations.

15 177. The results of the Company’s Audit Committee have yet to be 16 disclosed. 17 LOSS CAUSATION 18 178. The market for American Apparel’s publicly traded securities was 19 open, well-developed and efficient at all relevant times. As a result of Defendants’ 20 materially false and misleading statements and failure to disclose material facts as 21 allege above, American Apparel’s publicly-traded securities traded at artificially 22 inflated prices during the Class Period. Lead Plaintiff and other members of the 23 Class purchased or otherwise acquired American Apparel securities relying upon 24 the integrity of the market price of American Apparel’s securities and market

25 information relating to American Apparel, and have been damaged thereby. 26 179. Throughout the Class Period, Defendants engaged in a fraudulent 27 course of conduct that artificially inflated American Apparel’s stock price and 28

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operated as a fraud or deceit on Class Period purchasers of American Apparel

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securities. Defendants achieved this façade of success, growth, responsibility and

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strong future business prospects by misrepresenting the Company’s compliance

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with immigration laws, financial responsibility, effect of immigration sanctions,

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ability to continue as a going concern and true financial condition. Defendants’

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false and misleading statements and material omissions had their intended effect,

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causing American Apparel’s stock to trade at artificially inflated prices throughout

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the Class Period, reaching as high as $15.60 per share on December 12, 2007.

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180. The economic loss, i.e. , damages, suffered by Lead Plaintiff and other

10 I members of the Class was a direct result of Defendants’ scheme to conceal their

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immigration law violations and their effects to artificially inflate the Company’s

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stock price and the subsequent significant decline in the value of American

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Apparel’s stock price as the relevant truth was revealed in a series of partial adverse

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disclosures. When Defendants’ prior misrepresentations were disclosed and

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became apparent to the market, American Apparel’s stock price fell as the prior

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inflation came out of American Apparel’s stock price. By the time the market had

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fully digested these disclosures, American Apparel’s common stock closed at $0.75

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per share on August 19, 2010.

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181. Defendants’ false and misleading representations and omissions about

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the Company’s compliance with immigration laws, financial controls, effect of

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immigration sanctions, ability to continue as a going concern and true financial

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condition caused and maintained the artificial inflation in American Apparel’s stock

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price throughout the Class Period until the facts about the Company’s true financial

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condition were revealed to the market. These revelations did not happen all at once,

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but rather were the result of investigation by investors, analysts, ratings agencies

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and journalists. The timing and magnitude of American Apparel’s securities price

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declines, as detailed herein, negate any inference that the loss suffered by Lead

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Plaintiff and the Class was caused by changed market conditions or other

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macroeconomic factors unrelated to Defendants’ fraudulent conduct.

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182. On June 30, 2009, the Company filed a Form 8-K with the SEC,

4 authored by Charney. The Form 8-K disclosed that the Company had been notified

5 by ICE that “it was unable to verify the employment eligibility of approximately

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200 current employees because of discrepancies in these employees’ records.

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Additionally, ICE notified the Company that another approximately 1,600 current

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employees appear not to be authorized to work in the United States and appear to

9 have obtained employment by providing, on Form I-9, documentation which ICE

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believes, based on its proprietary databases, to be suspect and not valid.” On July 1,

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2009, the Company issued a press release entitled, “American Apparel Announces

12 Developments Regarding Inspection by U.S. Immigration and Customs

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Enforcement.” In response to this news which contradicted Defendants’ prior

14 representations about the Company’s immigration compliance, from June 30 to July

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2, 2009, the Company’s stock price fell approximately 16%.

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183. Then, on March 25, 2010, the Company issued a press release entitled

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“American Apparel Reports Fourth Quarter and Full Year 2009 Financial Results.”

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In the press release, the Company reported:

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Gross margin for the fourth quarter of 2009 was 55.0% as compared to

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54.5% for the prior year fourth quarter. Gross margin was favorably

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impacted by the depreciation of the U.S. dollar against foreign

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currencies in the fourth quarter of 2009 compared to the fourth quarter

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of 2008, and by a continuing shift in mix from wholesale to retail sales,

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which generate higher gross margins. These factors were largely offset

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by a substantial reduction in manufacturing efficiency at the

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company’s production facilities in the fourth quarter of 2009 compared

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to the prior year period. The reduction in manufacturing efficiency

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was principally a result of the forced termination of over 1,500

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experienced manufacturing employees in the third and fourth quarters

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of 2009 following the completion of the previously disclosed I-9

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inspection by U.S. Immigration and Customs Enforcement.

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Additionally, gross margin was also negatively impacted by lower

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capacity utilization of the company’s manufacturing facilities in the

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first half of 2009, and the substantial reduction in manufacturing

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efficiency experienced in the fourth quarter of 2009 at the company’s

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production facilities.

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184. The March 25, 2010 press release also stated that because of its

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practice of hiring workers who were ineligible for employment in the U.S., the

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Company was unable to provide annual financial guidance:

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Based on the substantial impact of the reduced manufacturing

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efficiency experienced at the company’s production facilities

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beginning in the fourth quarter of 2009, and the high level of

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uncertainty surrounding the duration of the reduction in efficiency, as

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well as due to uncertainty stemming from the company’s constrained

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ability to undertake additional investments in its business as a result of

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certain restrictive financial covenants under the company’s credit

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facilities, the company has determined to defer providing annual

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financial guidance for 2010 until it reports its first quarter 2010

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financial results in early May.

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185. In response, the next day the Company’s stock price dropped 17.45%

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to $3.17, on heavy trading of 1.85 million shares. The following trading day, the

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Company’s stock price dropped an additional 6.31% to $2.97.

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186. On May 19, 2010, the Company issued a press release entitled

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“American Apparel Reports Preliminary First Quarter 2010 Financial Results.” In

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the press release, the Company disclosed the continuing fallout from its

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immigration violations:

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Gross margin for the first quarter of 2010 was 50.4% as compared to

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57.2% for the prior year first quarter. Gross margin was negatively

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impacted by a shift in mix from retail to wholesale net sales, which

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generate lower margins, and by reduced labor efficiency at the

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company’s production facilities in the first quarter of 2010 compared

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to the prior year period. The reduction in labor efficiency was a result

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of the dismissal of over 1,500 experienced manufacturing employees in

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the third and fourth quarters of 2009 following the completion of an I-9

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inspection by U.S. Immigration and Customs Enforcement.

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The company currently expects that the reduced manufacturing

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efficiency at the company’s production facilities beginning during the

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fourth quarter of 2009 could likely continue through the end of 2010,

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and could impact the company’s financial results at least through early

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2011. The company experienced an improvement in production

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efficiency in the first quarter of 2010 versus the fourth quarter of 2009,

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but anticipates a temporary worsening in efficiency during the second

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quarter of 2010 as additional manufacturing workers will need to be

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hired and trained to meet a seasonal increased demand for the

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company’s products. The duration and ultimate financial impact of the

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inefficiencies is difficult to estimate, and the financial impact in future

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quarters could differ significantly from the level experienced during

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the first quarter of 2010.

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187. That day, as a result of the Defendants’ disclosures, which partially

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revealed the truth regarding the Company’s true financial condition and impact of

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Defendants’ prior misconduct, the Company’s stock price dropped 40.51%, or

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$1.11 per share, from the prior day’s close of $2.74 to $1.63, on trading of over 2.8

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million shares.

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188. On July 28, 2010, the Company filed a Form 8-K with the SEC. The

7 Form 8-K announced that Deloitte, the Company’s independent registered public

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accountant, had resigned effective July 22, 2010. The Form 8-K further stated that

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“Deloitte advised the Company that certain information has come to Deloitte’s

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attention, that if further investigated may materially impact the reliability of either

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its previously issued audit report or the underlying consolidated financial statements

12 for the year ended December 31, 2009 included in the Company’s 2009 Form 10-

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K.” In response to this news, American Apparel’s stock declined 14.36%, to $1.55,

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on heavy trading.

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189. Finally, on August 17, 2010, Defendants revealed the full effects of

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their accounting and immigration shenanigans previously concealed from investors.

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That day, the Company issued a press release entitled “American Apparel Reports

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Preliminary Second Quarter 2010 Financial Results.” The press release reported

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that the Company expected to report a loss of $5 million to $7 million in 2Q10 on

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net sales of $132 million to $134 million. Moreover, a significant factor in such

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losses was “lower labor efficiency at the Company’s production facilities in the

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second quarter of 2010 compared to the prior year period. The lower labor

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efficiency was primarily a result of the hiring of over 1,600 net new manufacturing

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workers during the second quarter of 2010.” The press release continued: “[g]ross

25 margin for the second quarter of 2010 is expected to be in the range of 50% to 52%,

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as compared to 59.0% for the prior year second quarter.”

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190. The August 17, 2010, press release also stated for the first time that, as

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a result of the Company’s poor performance which substantially related to its prior

3 misconduct, its very existence was now in doubt, stating “the Company may not

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have sufficient liquidity necessary to sustain operations for the next twelve months

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[which] raise substantial doubt that the Company will be able to continue as a going

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concern.” On this news, shares of the Company’s stock tumbled 25.9%, to close on

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August 17, 2010 at $1.03 per share, on heavy trading volume. As the market

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continued to digest this news, the Company’s stock fell an additional 27.2%, to

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close on August 19, 2010 at approximately $0.75 per share, on unusually heavy

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trading volume.

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PLAINTIFF’S CLASS ACTION ALLEGATIONS

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191. Plaintiff brings this action as a class action pursuant to Fed. R. Civ. P.

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23(a) and (b)(3) on behalf of a class of all persons and entities who purchased the

14 publicly traded common stock of American Apparel between November 28, 2007

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and August 17, 2010, inclusive (the “Class”). Excluded from the Class are

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Defendants, directors and officers of American Apparel and their families and

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affiliates.

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192. The members of the Class are so numerous that joinder of all members

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is impracticable. The disposition of their claims in a class action will provide

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substantial benefits to the parties and the Court. While the exact number of Class

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members is unknown to Plaintiff at the present time and can only be ascertained

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through appropriate discovery, Plaintiff believes that there are hundreds, if not

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thousands of members of the Class located throughout the United States.

24 According to the Company’s 2009 Annual Report, American Apparel has over 71

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million shares of stock outstanding traded on the American Stock Exchange, a

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national market.

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e 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID #:2181

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193. There is a well-defined community of interest in the questions of law

2 and fact involved in this case. Questions of law and fact common to the members

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of the Class which predominate over questions which may affect individual Class

4 members include:

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(a) Whether the Securities Exchange Act was violated by

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Defendants;

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(b) Whether Defendants omitted and/or misrepresented material

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facts;

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(c) Whether Defendants’ statements omitted material facts

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necessary in order to make the statements made, in light of the circumstances under

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which they were made, not misleading;

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(d) Whether Defendants knew or recklessly disregarded that their

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statements were false and misleading;

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(e) Whether the prices of American Apparel securities were

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artificially inflated; and

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(f) The extent of damage sustained by Class members and the

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appropriate measure of damages.

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194. Plaintiff’s claims are typical of those of the Class because Plaintiff and

19 the Class sustained damages from Defendants’ wrongful conduct.

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195. Plaintiff will adequately protect the interests of the Class and has

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retained counsel who are experienced in class action securities litigation. Plaintiff

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has no interests which conflict with those of the Class.

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196. A class action is superior to other available methods for the fair and

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efficient adjudication of this controversy. Plaintiff knows of no difficulty to be

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encountered in the management of this action that would preclude its maintenance

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as a class action.

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APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

197. Plaintiff will rely upon the presumption of reliance established by the

fraud-on-the-market doctrine in that, among other things:

(a) Defendants made public misrepresentations or failed to disclose

material facts during the Class Period;

(b) The omissions and misrepresentations were material;

(c) The Company’s securities traded in an efficient market;

(d) The misrepresentations alleged would tend to induce a

reasonable investor to misjudge the value of the Company’s securities; and

(e) Plaintiff and other members of the Class purchased American

Apparel securities between the time Defendants misrepresented or failed to disclose

material facts and the time the true facts were disclosed, without knowledge of the

misrepresented or omitted facts.

198. At all relevant times, the market for American Apparel securities was

efficient for the following reasons, among others: (a) as a regulated issuer,

American Apparel filed periodic public reports with the SEC; and (b) American

Apparel regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press

releases on the major news wire services and through other wide-ranging public

disclosures, such as communications with the financial press, securities analysts and

other similar reporting services.

Applicability of the Affiliated Ute Presumption of Reliance

199. Plaintiff is also entitled to the Affiliated Ute presumption of reliance

because Defendants’ fraudulent scheme also involved a failure to disclose and/or

concealment of material facts concerning Defendants’ overall financial condition

and operations, information which the market was entitled to know and which may

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have caused investors not to purchase shares of American Apparel at the prices they

traded at during the Class Period.

NO SAFE HARBOR

200. Defendants’ verbal “Safe Harbor” warnings accompanying their oral

forward-looking statements issued during the Class Period were ineffective to

shield those statements from liability.

201. The Defendants are also liable for any false or misleading forward-

looking statements pleaded because, at the time each forward-looking statement

was made, the speaker knew the forward-looking statement was false or misleading

and the forward-looking statement was authorized and/or approved by an executive

officer of American Apparel who knew that the forward-looking statement was

false. None of the historic or present tense statements made by Defendants were

assumptions underlying or relating to any plan, projection or statement of future

economic performance, as they were not stated to be such assumptions underlying

or relating to any projection or statement of future economic performance when

made, nor were any of the projections or forecasts made by Defendants expressly

related to or stated to be dependent on those historic or present tense statements

when made.

FIRST CLAIM

Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder

Against All Defendants (Except Lion Capital)

202. Plaintiff repeats and realleges each and every allegation contained

above as if fully set forth herein.

203. During the Class Period, American Apparel and the Individual

Defendants carried out a plan, scheme and course of conduct which was intended to

and, throughout the Class Period, did: (i) deceive the investing public, including

Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and

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other members of the Class to purchase American Apparel securities at artificially

inflated prices. In furtherance of this unlawful scheme, plan and course of conduct,

these Defendants, and each of them, took the actions set forth herein.

204. American Apparel and the Individual Defendants: (i) employed

devices, schemes, and artifices to defraud; (ii) made untrue statements of material

fact and/or omitted to state material facts necessary to make the statements not

misleading; and (iii) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in

an effort to maintain artificially high market prices for American Apparel securities

in violation of §10(b) of the Exchange Act and Rule 10b-5. These Defendants are

sued either as primary participants in the wrongful and illegal conduct charged

herein or as controlling persons.

SECOND CLAIM

Violation of Section 20(a) of the Exchange Act Against the Individual Defendants and Lion Capital

205. Plaintiff repeats and realleges each and every allegation contained

above as if fully set forth herein.

206. The Individual Defendants acted as controlling persons of American

Apparel within the meaning of §20(a) of the Exchange Act as alleged herein. By

virtue of their high-level positions, and their ownership and contractual rights,

participation in and/or awareness of the Company’s operations and/or intimate

knowledge of the false financial statements filed by the Company with the SEC and

disseminated to the investing public, the Individual Defendants had the power to

influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the

various statements which Plaintiff contends are false and misleading. These

Defendants were provided with or had unlimited access to copies of the Company’s

reports, press releases, public filings and other statements alleged by Plaintiff to be

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misleading prior to and/or shortly after these statements were issued and had the

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ability to prevent the issuance of the statements or cause the statements to be

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corrected.

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207. Beginning in March 2009, Lion Capital acted as a controlling person of

5 American Apparel within the meaning of §20(a) of the Exchange Act as alleged

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herein. By virtue of its high-level positions, and its ownership and contractual

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rights, participation in and/or awareness of the Company’s operations and/or

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intimate knowledge of the false financial statements filed by the Company with the

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SEC and disseminated to the investing public, Lion Capital had the power to

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influence and control and did influence and control, directly or indirectly, the

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decision-making of the Company, including the content and dissemination of the

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various statements which Plaintiff contends are false and misleading. Lion Capital

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provided with or had unlimited access to copies of the Company’s reports, press

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releases, public filings and other statements alleged by Plaintiff to be misleading

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prior to and/or shortly after these statements were issued and had the ability to

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prevent the issuance of the statements or cause the statements to be corrected. For

17 instance, Lion Capital (and American Apparel Board) members Richardson and

18 Capps signed the Company’s 2009 Annual Report .

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208. Each of the Individual Defendants had direct and supervisory

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involvement in the day-to-day operations of the Company and, therefore are

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presumed to have had the power to control or influence the particular transactions

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giving rise to the securities violations as alleged herein, and exercised the same.

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209. As set forth above, American Apparel and the Individual Defendants

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each violated §10(b) of the Exchange Act and Rule 10b-5 by their acts and

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omissions as alleged in this Complaint. By virtue of their positions as controlling

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persons, the Individual Defendants are liable pursuant to §20(a) of the Exchange

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Act. As a direct and proximate result of these Defendants’ wrongful conduct,

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:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID

#:2186

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Plaintiff and other members of the Class suffered damages in connection with their

purchases of the Company's securities during the Class Period. In addition, Lion

Capital's financial interest in the Company gave Lion Capital a nearly 20%

ownership interest in American Apparel and the stock warrants given to Lion

Capital, if exercised, could have diluted Charney's American Apparel equity stake

from majority to a non-majority stock owner.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action under Rule 23 of

the Federal Rules of Civil Procedure;

B. Awarding compensatory damages and equitable relief in favor of

Plaintiff and the other Class members against all Defendants, jointly and severally,

for all damages sustained as a result of Defendants' wrongdoing, in an amount to be

proven at trial, including interest thereon;

C. Awarding Plaintiff and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

D. Such equitable and other relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: February 27, 2012 KESSLER TOPAZ MELTZER & CHECK, LLP

By sr_

Ramzi Abadou Eli R. Greenstein Stacey M. Kaplan Erik D. Peterson 580 California Street, Suite 1750 San Francisco, CA 94104 Telephone: (415) 400-3000 Facsimile: (415) 400-3001

Lead Counsel for Lead Plaintiff Charles Rendelman

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Case 2 :10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID

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DECLARATION OF SERVICE BY E-MAIL AND MAIL

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of

the United States and employed in the City and County of San Francisco, over the

age of 18 years, and not a party to or interested party in the within action; that

declarant's business address is 580 California Street, Suite 1750, San Francisco, CA

94104.

2. That on February 27, 2012, declarant served the First Amended Class

Action Complaint For Violation of Federal Securities Laws via e-mail and by

depositing a true copy thereof in a United States mailbox at San Francisco,

California in a sealed envelope with postage thereon fully prepaid and addressed to

the following parties:

Harriet S. Posner Peter Bradley Morrison Gila D. Jones Skadden Arps Slate Meagher & Flom 300 South Grand Ave, Suite 3400 Los Angeles, CA 90071-3144 E-mail: [email protected] E-mail: [email protected]

j E-mail: gilaones@skad'den.com

Seth A. Aronson Amy J. Longo Jennifer H. Cheng Lindsay Lara Geida O'Melveny and Myers LLP 400 South Hope Street Los Angeles, CA 90071 E-mail: [email protected] E-mail: [email protected] E-mail:

igeidagomm.com enniferchengomm .com

E-mail:

Michael G. Freedman Chet A. Kronenbe Sim

rg son Thacher & Bartlett LLP

1999 Avenue of the Stars, 29th Floor Los Angeles, CA 90067 E-mail: [email protected] E-mail: ckronenbergstblaw.com 27

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Case 2 :10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID

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I declare under penalty of perjury under the laws of the United States of

America that the foregoing is true and correct. Executed on February 27, 2012, at

San Francisco, California.

&• _4 , \Cynthia Sheiard

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Case 2:10-cv-06352-MMM-JCG Document 106 Filed 02/27/12 of 99 Page ID

#:2189

EXHIBIT A


#:2190

OMB No. 1615-0047; Expires 08/31/12

Department of Homeland Security Form 1-9, Employment

U.S. Citizenship and Immigration Services Eligibility Verification

Instructions Read all instructions carefully before completing this form.

Anti-Discrimination Notice. It is illegal to discriminate against any individual (other than an alien not authorized to work in the United States) in hiring, discharging, or recruiting or referring for a fee because of that individuals national origin or citizenship status. It is illegal to discriminate against work-authorized individuals. Employers CANNOT specify which document(s) they will accept from an employee. The refusal to hire an individual because the documents presented have a future expiration date may also constitute illegal discrimination. For more information, call the Office of Special Counsel for Immigration Related Unfair Employment Practices at 1-800-255-8155.

What Is the Purpose of This Form"

The purpose of this form is to document that each new employee (both citizen and noncitizen) hired after November 6, 1986, is authorized to work in the United States.

NN hen Sh.,tjl(J Iirni 1-9 Re I sed?

All employees (citizens and noncitizens) hired after November 6, 1986, and working in the United States must complete Form 1-9.

Fitlinti Out Form 19

Section 1, Employee

This part of the form must be completed no later than the time of hire, which is the actual beginning of employment. Providing the Social Security Number is voluntary, except for employees hired by employers participating in the USCIS Electronic Employment Eligibility Verification Program (E-Verify). The employer is responsible for ensuring that Section 1 is timely and properly completed.

Noncitizen nationals of the United States are persons born in American Samoa, certain former citizens of the former Trust Territory of the Pacific Islands, and certain children of noncitizen nationals born abroad.

Employers should note the work authorization expiration date (if any) shown in Section 1. For employees who indicate an employment authorization expiration date in Section 1, employers are required to reverify employment authorization for employment on or before the date shown. Note that some employees may leave the expiration date blank if they are aliens whose work authorization does not expire (e.g., asylees, refugees, certain citizens of the Federated States of Micronesia or the Republic of the Marshall Islands). For such employees, reverification does not apply unless they choose to present

in Section 2 evidence of employment authorization that contains an expiration date (e.g., Employment Authorization Document (Form 1-766)).

Preparer/Translator Certification

The Preparer/Translator Certification must be completed if Section 1 is prepared by a person other than the employee. A preparer/translator may be used only when the employee is unable to complete Section 1 on his or her own. However, the employee must still sign Section 1 personally.

Section 2, Employer

For the purpose of completing this form, the term "employer" means all employers including those recruiters and referrers for a fee who are agricultural associations, agricultural employers, or farm labor contractors. Employers must complete Section 2 by examining evidence of identity and employment authorization within three business days of the date employment begins. However, if an employer hires an individual for less than three business days, Section 2 must be completed at the time employment begins. Employers cannot specify which document(s) listed on the last page of Form I-9 employees present to establish identity and employment authorization. Employees may present any List A document OR a combination of a List B and a List C document.

If an employee is unable to present a required document (or documents), the employee must present an acceptable receipt in lieu of a document listed on the last page of this form. Receipts showing that a person has applied for an initial grant of employment authorization, or for renewal of employment authorization, are not acceptable. Employees must present receipts within three business days of the date employment begins and must present valid replacement documents within 90 days or other specified time.

Employers must record in Section 2:

1. Document title; 2. Issuing authority; 3. Document number; 4. Expiration date, if any; and 5. The date employment begins.

Employers must sign and date the certification in Section 2. Employees must present original documents. Employers may, but are not required to, photocopy the document(s) presented. If photocopies are made, they must be made for all new hires. Photocopies may only be used for the verification process and must be retained with Form 1-9. Employers are still responsible for completing and retaining Form 1-9.

Form 1-9 (Rev. 08/07/09) Y


#:2191

For more detailed information, you may refer to the USCIS Handbook for Employers (Form M-274). You may obtain the handbook using the contact information found under the header "USCIS Forms and Information."

Section 3, Updating and Reverification

Employers must complete Section 3 when updating and/or reverifying Form 1-9. Employers must reverify employment authorization of their employees on or before the work authorization expiration date recorded in Section 1 (if any). Employers CANNOT specify which document(s) they will accept from an employee.

A. If an employees name has changed at the time this form is being updated/reverified, complete Block A.

B. If an employee is rehired within three years of the date this form was originally completed and the employee is still authorized to be employed on the same basis as previously indicated on this form (updating), complete Block B and the signature block.

C. If an employee is rehired within three years of the date this form was originally completed and the employee's work authorization has expired or if a current employee's work authorization is about to expire (reverification), complete Block B; and:

1. Examine any document that reflects the employee is authorized to work in the United States (see List A or C);

2. Record the document title, document number, and expiration date (if any) in Block C; and

3. Complete the signature block.

Note that for reverification purposes, employers have the option of completing a new Form 1-9 instead of completing Section 3.

\\ thit Is the Filing Fee?

There is no associated filing fee for completing Form 1-9. This form is not filed with USCIS or any government agency. Form 1-9 must be retained by the employer and made available for inspection by U.S. Government officials as specified in the Privacy Act Notice below.

---. ,.--- .-.

USCIS Forms and Information

To order USCIS forms, you can download them from our website at www.uscis.gov/forms or call our toll-free number at 1-800-870-3676. You can obtain information about Form 1-9 from our website at www.uscis.gov or by calling 1-888-464-4218.

Information about E-Verify, a free and voluntary program that allows participating employers to electronically verify the employment eligibility of their newly hired employees, can be obtained from our website at www.uscis.gov/e-verify or by calling 1-888-464-4218.

General information on immigration laws, regulations, and procedures can be obtained by telephoning our National Customer Service Center at 1-800-375-5283 or visiting our Internet website at www.uscis.gov .

)toc()I)N ing and Retaining Form 1-9

A blank Form 1-9 may be reproduced, provided both sides are copied. The Instructions must be available to all employees completing this form. Employers must retain completed Form I-9s for three years after the date of hire or one year after the date employment ends, whichever is later.

Form 1-9 may be signed and retained electronically, as authorized in Department of Homeland Security regulations at 8 CFR 274a.2.

P riN acN Act Notice

The authority for collecting this information is the Immigration Reform and Control Act of 1986, Pub. L. 99-603 (8 USC 1324a).

This information is for employers to verify the eligibility of individuals for employment to preclude the unlawful hiring, or recruiting or referring for a fee, of aliens who are not authorized to work in the United States.

This information will be used by employers as a record of their basis for determining eligibility of an employee to work in the United States. The form will be kept by the employer and made available for inspection by authorized officials of the Department of Homeland Security, Department of Labor, and Office of Special Counsel for Immigration-Related Unfair Employment Practices.

Submission of the information required in this form is voluntary. However, an individual may not begin employment unless this form is completed, since employers are subject to civil or criminal penalties if they do not comply with the Immigration Reform and Control Act of 1986.

EMPLOYERS MUST RETAIN COMPLETED FORM 1-9 Form 1-9 (Rev. 08/07/09) Y Page 2

DO NOT MAIL COMPLETED FORM 1-9 TO ICE OR USCIS


#:2192

LPapet - NNorkReduction Act

An agency may not conduct or sponsor an information collection and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The public reporting burden for this collection of information is estimated at 12 minutes per response, including the time for reviewing instructions and completing and submitting the form. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to: U.S. Citizenship and Immigration Services, Regulatory Management Division, 111 Massachusetts Avenue, N.W., 3rd Floor, Suite 3008, Washington, DC 20529-2210. OMB No. 1615-0047. Do not mail your completed Form 1-9 to this address.

Form 1-9 (Rev. 08/07/09) Y Page 3


#:2193 OMB No. 1615-0047; Expires 08/31/12

Department of Homeland Security Form 1-9, Employment U.S. Citizenship and Immigration Services Eligibility Verification

Read instructions carefully before completing this form. The instructions must be available during completion of this form.

ANTI-DISCRIMINATION NOTICE: It is illegal to discriminate against work-authorized individuals. Employers CANNOT specify which document(s) they will accept from an employee. The refusal to hire an individual because the documents have a future expiration date may also constitute illegal discrimination.

Section 1. Emi and Verification (To be Print Name: Last First Middle Initial I Maiden Name

Address (Street Name and Numbe;) Apt. # I Date of Birth (month/day/year)

Security #

I am aware that federal law provides for imprisonment and/or fines for false statements or use of false documents in connection with the completion of this form.

I attest, under penalty of perjury, that I am (check one of the following):

A citizen of the United States

A noncitizen national of the United States (see instructions)

A lawful permanent resident (Alien #)

An alien authorized to work (Alien # or Admission 8) -

until (expiration date, if applicable - month/day/year)

Employees Signature Date (month/day/year)

Preparer and/or Translator Certification (To be completed and signed ifSection 1 is prepared by aperson other than the employee) lattest, under penalty ofperjury, that I have assisted in the completion of this form and that to the best of my knowledge the information is true and correct.

Preparer's/Translator's Signature Name

Address (Street Name and Number, City, State, Zip Code) I Date (month/day/year)

Section 2. Employer Review and Verification (To be completed and signed by employer. Examine one document from List A OR examine one document from List B and one from List C, as listed on the reverse of this form, and record the title, number, and expiration date, if any, of the document(s))

List A OR List B AI'jQ. List C

Document title:

Issuing authority:

Document #:

Expiration Date ((f any):

Document #:

Expiration Date (f any):

CERTIFICATION: I attest, under penalty of perjury, that! have examined the document(s) presented by the above-named employee, that the above-listed document(s) appear to be genuine and to relate to the employee named, that the employee began employment on (month/day/year) and that to the best of my knowledge the employee is authorized to work in the United States. (State employment agencies may omit the date the employee began employment.)

C. If employee's previous grant of work authorization has expired, provide the infonnation below for the document that establishes current employment authorization.

Document Title: Document 8: Expiration Date (f any):

I attest, under penalty of perjury, that to the best of my knowledge, this employee is authorized to work in the United States, and if the employee presented document(s), the document(s) I have examinedappear to be genuine and to relate to the individual. -

Form 1-9 (Rev. 08/07/09) Y Page 4

or


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LISTS OF ACCEPTABLE DOCUMENTS All documents must be unexpired

LIST A LIST B

Documents that Establish Both Documents that Establish Identity and Employment Identity

Authorization OR

AND

LIST C

Documents that Establish Employment Authorization

1. U.S. Passport or U.S. Passport Card 1. Driver's license or ID card issued by 1. Social Security Account Number a State or outlying possession of the card other than one that specifies United States provided it contains a on the face that the issuance of the photograph or information such as card does not authorize

2. Permanent Resident Card or Alien name, date of birth, gender, height, employment in the United States

Registration Receipt Card (Form eye color, and address

1-551) 2. Certification of Birth Abroad

2. ID card issued by federal, state or issued by the Department of State 3. Foreign passport that contains a local government agencies or (Form FS-545)

temporary 1-551 stamp or temporary entities, provided it contains a 1-551 printed notation on a machine- photograph or information such as readable immigrant visa name, date of birth, gender, height,

eye color, and address 3. Certification of Report of Birth issued by the Department of State

4. Employment Authorization Document 3. School ID card with a photograph (Form DS-1350)

that contains a photograph (Form 1-766) 4. Voter's registration card 4. Original or certified copy of birth

certificate issued by a State,

5. In the case of a nonimmigrant alien 5. U.S. Military card or draft record county, municipal authority, or

authorized to work for a specific _____________________________________ territory of the United States

employer incident to status, a foreign 6. Military dependent's ID card bearing an official seal

passport with Form 1-94 or Form I-94A bearing the same name as the

7. U.S. Coast Guard Merchant Mariner passport and containing an

Card 5. Native American tribal document

endorsement of the alien's nonimmigrant status, as long as the

8. Native American tribal document period of endorsement has not yet expired and the proposed 6. U.S. Citizen ID Card (Form 1-197)

9. Driver's license issued by a Canadian employment is not in conflict with any restrictions or limitations

government authority

identified on the form For persons under age 18 who 7. Identification Card for Use of

are unable to present a Resident Citizen in the United document listed above: States (Form 1-179)

6. Passport from the Federated States of Micronesia (FSM) or the Republic of the Marshall Islands (RMI) with 10. School record or report card 8. Employment authorization

Form 1-94 or Form I-94A indicating _____________________________________ document issued by the

nonimmigrant admission under the 11. Clinic, doctor, or hospital record Department of Homeland Security

Compact of Free Association Between the United States and the FSM or

12. Day-care or nursery school record

Illustrations of many of these documents appear in Part 8 of the Handbook for Employers (M-274) Form 1-9 (Rev. 08/07/09) Y Page 5


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EXHIBIT B

Body Magazine // Fashion News // American Apparel: New Cfo


#:2196

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American Apparel: New Cfo

a a 4 CL

I

I

I Adrian Kowalewski

reporting.

Related Articles American Apparel 3Q Sales -2.9% American Apparel Cites 34% 2Q Drop American Apparel: New Cfo Aafa Forms Product Safety Council

(Filed Under Fashion News). American

Apparel has announced Adrian Kowalewski

as its new chief financial officer and

executive vice president.

Kowaleski has been working with

American Apparel since 2006 serving as the

company’s director of corporate finance and

development where his responsibilities

included finance, corporate strategy and

investor relations. Under his new position,

Kowaleski will oversee financial

management, accounting and financial

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“The board of directors is very pleased that Adrian has agreed to take on the added responsibility of

serving as CFO,” said Dov Charney, chairman and chief executive officer. “In light of his past

contributions to American Apparel, and his efforts over the past six months in helping build the

accounting and finance functions at the company, both I and the rest of the board have full confidence

that he will serve the company well in this new leadership role.

see more more Fashion News >>

Published 01-05-2009 by Bruna Fernandes

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