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Charney Plans to Sue American Apparel Board

Stocks in this article: APP ICON SQBG

NEW YORK (The Deal) -- A source familiar with American Apparel (APP - Get Report) believes the hipster retailer's recent equity financing was part of a conspiracy to dilute founder and CEO Dov Charney's stake in his company and said the embattled executive plans to sue the company's board for its failure to disclose the fact that it was investigating him and planning to fire him.

The source asserted that the board committed fraud by failing to mention, either in proxy materials or other communications, that it was conducting a probe of the CEO and planning to oust him ahead of a late-March share offering and June 18 annual shareholder meeting.

"The board conspired to deceive shareholders," said the source, who asked to remain unnamed. "There should have been disclosure."

Los Angeles-based American Apparel is taking legal advice from attorneys at Jones Day and also announced today that it has retained advisers from investment bank Peter J. Solomon to ensure that it maintains "adequate access to capital in the future at a reasonable cost," according to a June 23 statement.

A Peter J. Solomon representative declined to comment. Jones Day didn't return calls. When reached by phone, Charney declined to comment.

In an email, American Apparel's new co-chairman, Allan Mayer, said, "We continue to believe we did the right thing, for the right reasons, in the right way, and are very confident we are on very str ong legal ground."

Mayer denied that the March equity raise was an intentional move to dilute Charney and make it easier to fire him.

Nor is American Apparel on the block. "We are certainly not looking to sell the company," Mayer wrote.

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