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American Apparel Files for Bankruptcy After Years of Scandal

By Casey C. Sullivan, Esq. on October 05, 2015 | Last updated on March 21, 2019

American Apparel filed for Chapter 11 bankruptcy protection this morning. The once-hip retailer popularized metallic spandex leggings and made-in-LA t-shirts in the early 2000s but has struggled with waning sales and tumbling stock prices. The company warned investors in August that it might not have the funds needed to meet its debt obligations.

Chapter 11 protection should allow American Apparel to keep open its Los Angeles manufacturing centers and 130 retail stores while it undergoes a debt-for-equity conversion. The company's current troubles are just one more reminder of how unfavorable market forces, poor planning, and questionable (to put it mildly) leadership can tank a promising company.

From Booming to Broke

American Apparel was founded by Dov Charney in 1989 but didn't begin to take off until it entered the retail market in the early aughts. A combination of made-in-America clothing, risque advertising, and hipster appeal helped the retailer grow quickly. In 2005, it reported a 440 percent three-year growth rate and was considered one of the fastest growing companies in the United States.

At the same time, the company's founder gained fame and notoriety for his "unconventional" business behavior. He was known for working in his underwear, sleeping with employees, and using amateur porn themed advertising. And that was when he was on good behavior. Some "low points" in Charney's tenure at American Apparel reportedly include masturbating in front of a reporter, choking a store manager, and keeping a former employee as a "teenage sex slave."

If Dov built the company up, he also ran it into the ground. By 2007, the company was being sued left and right, for both sexual harassment and labor violations. It hasn't made a profit since 2009; in 2010, Deloitte & Touche resigned as the company's accountant, saying its financial statements were not reliable. Today, its stock trades for about a nickel a share.

Not Over Yet

The company fired Charney in 2014, but that hasn't totally severed their relationship. Charney remains one of American Apparel's largest stock holders, with 43 percent of the company's stock. He is also in the midst of several America Apparel lawsuits, this time as a plaintiff, rather than defendant.

While the company may want Dov Charney gone (it sought a restraining order against him in June), it's keeping the rest of its employees around for the time being. The company hasn't announced any other layoffs following its bankruptcy filing. If the Delaware bankruptcy court approves of the company's filing, its creditors will be put in control of the restructuring. One of the largest of those is Standard General, according to The New York Times. In addition to American Apparel, Standard General is also trying to lead the turn-around of RadioShack, another recent retail bankruptcy.

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