(Update adds further response from the company; updates stock price at the market close.)

American Apparel ( APP) touts its patriotism, boasting that it produces all of its clothes on American shores. This shouldn't do much to help that campaign: The U.S. government said today that the t-shirt maker is potentially employing about 1,800 illegal immigrants.

The disclosure came as a result of an investigation by U.S. Immigration and Customs Enforcement. Of the 1,800 workers identified, 1,600 were deemed to be unauthorized to work, while officials were unable to verify the status of the other 200.

A lawyer for the company, in response to our initial coverage, took pains to point out that if the company had hired illegal workers, it did so unknowingly, and that the government had not charged the company with any crimes. American Apparel said it is being allowed to further review the status of the workers, and only if those workers are unable to provide proof of eligibility will they be forced to leave the company.

According to the company, the loss of nearly 1,600 workers is not expected to hurt its financial results. The company said it has a surplus of inventory and production capacity.

The company happily boasts of its sweatshop-free work environment and fair wages. But investors were none too happy about today's news, sending shares sinking more than 9% to $3.30 at Wednesday's market close.

Recently the company paid $5 million to Woody Allen to settle a lawsuit in which the director had sued the retailer for the unauthorized use of his image on a billboard. American Apparel had depicted Allen as a Hasidic Jew with a long beard, side curls and black hat.
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