1 Consolidated Class Action Complaint For Violation Of Federal Securities Laws 04/29/2011

Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1184

1 BARROWAY TOPAZ KESSLER FILED

2 MELTZER & CHECK, LLP CLERK U.S,^DISiRICT COURT

Ramzi Abadou (22256.7)3 [email protected] APR 2 g 2011

Stacey M. Kaplan (241989)4 skaplan@btkmc . com CEN " DISTRICT ' F CALIFORN A

Erik D. Peterson (257098) BY ' / _.__._ DEPUTY

5 [email protected] 580-California Street, Suite 1750

San Francisco, CA 941047 Telephone: (415) 400-3000

Facsimile: (415) 400-30018

Lead Counsel9

10 UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

11 WESTERN DIVISION

12

13 IN RE AMERICAN APPAREL, INC. ) Case No. CV-10-6352 MMM (JCG)SHAREHOLDER LITIGATION ) (Consolidated)

14) CONSOLIDATED CLASS ACTION

15 ) COMPLAINT FOR VIOLATION OFFEDERAL SECURITIES LAWS

16 )

17 This Document Relates To: j JURY TRIAL DEMANDED

y( 18 ALL ACTIONS )

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1 INTRODUCTION

2 1. Lead Plaintiff, Charles Rendelman ("Lead Plaintiff' or "Plaintiff"),

3 alleges the following based upon Lead Counsel's investigation, which included,

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

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

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

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

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

9 Company. Lead Plaintiff believes that substantial additional evidentiary support will

10 exist for the allegations set forth herein after a reasonable opportunity for discovery.

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

12 brought under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the

13 "Exchange Act"), and Rule lOb-5 promulgated thereunder by the SEC. Lead

14 Plaintiff's claims are brought on behalf of a class of all persons who purchased

15 American Apparel common stock between November 28, 2007 and August 17, 2010,

16 inclusive (the "Class Period"), to recover damages caused by Defendants' violations

17 of the securities laws.

18 3. Defendants are (i) American Apparel; (ii) the Company's Chief

19 Executive Officer ("CEO"), President and Chairman of the Board of Directors

20 ("Chairman"), Dov Charney ("Charney"); (iii) the Company's Director of Corporate

21 Finance and Development, Executive Vice President and Chief Financial Officer

22 ("CFO"), Adrian Kowalewski ("Kowalewski") (collectively, "Defendants"); 1 and (iv)

23 Lion Capital LLP, a private investment firm with a United States affiliate, Lion

24 Capital (Americas) Inc. (together "Lion Capital"). Lion Capital is named herein

25

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

27 Class Period.

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} Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1186

1 exclusively as a "control person" under §20(a) of the Exchange Act. American

2 Apparel is a self-described vertically-integrated manufacturer, distributor, and retailer

3 of branded fashion basic apparel. American Apparel also operates a leading

4 wholesale business that supplies T-shirts and other casual wear to distributors and

5 screen printers. All of American Apparel's manufacturing facilities for its global

6 operations and its headquarters are located near downtown Los Angeles.

7 SUMMARY OF THE ACTION

8 Defendants' Immigration Compliance Fraud

9 4. Immigration reform is a complex policy matter that, to this day, divides

10 the country and impacts people's lives in myriad ways. This federal securities class

11 action, however, is neither about immigration reform nor the somber challenges many

12 undocumented workers in America face. Rather, this case primarily involves

13 Defendants' efforts to mislead investors about American Apparel's compliance with

14 U.S. immigration law and the dire effects the Company's undisclosed, reckless

15 approach to compliance caused the Company's shareholders.

16 5. Throughout the Class Period, Defendants repeatedly and unequivocally

17 told the market that American Apparel (i) made "diligent efforts to comply with all

18 employment and labor regulations, including immigration laws;" (ii) that "American

19 Apparel's [garment factory] workers are documented immigrants and authorized to

20 work in the United States;" and (iii) that it was the "Company's policy, and has been

21 at all times, to fully comply with its obligations" under U.S. immigration laws. 2 As

22 alleged herein, these representations were utterly false. In early July 2009, the

23 Company was forced to disclose that Defendants had engaged in a decade-long

24 systemic pattern and practice of employing undocumented workers at its Los Angeles

25 factory. In fact, Defendants were ultimately fined by federal regulators after an

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27 2 All emphasis is added.

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1 Immigration and Custom's Enforcement ("ICE") I-9 audit found that Defendants had

2 unlawfully employed thousands of undocumented workers at its 800,000 square foot

3 Los Angeles garment factory. The Company's executive offices — including

4 Charney's and Kowalewski's — are located on the seventh floor of the same garment

5 factory.

6 6. American Apparel's labor practices have long been perceived as integral

7 to the Company's "brand," which the Company describes in its SEC filings as one of

8 its "core business strengths." According to the Company, it "has [] drawn attention to

9 the `Made in the USA' nature of its products and the `Sweatshop Free' environment in

10 which the Company's garments are produced." A Class Period analyst report issued

11 by KeyBanc Capital Markets perhaps best described American Apparel's "brand" as

12 follows:

13 APP'S domestic manufacturing helps differentiate its brand and gives it

14 competitive advantages. The Company is closely associated with its

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

16 most importantly, American manufacturing has become an integral part

17 of its branding. The Company offers $9412 hourly wages, health care,

18 subsidized meals, and other additional benefits. We believe this gives

19 the Company a critical marketing advantage, particularly as

20 consciousness of workplace conditions and environmental issues

21 becomes increasingly important in consumer buying habits.

22 7. In turn, American Apparel's purportedly pro-immigrant "brand" identity

23 has long been closely tied to the Company's founder and CEO, Charney. 3 Like the

24 success of its once novel "brand," however, American Apparel's reckless Class Period

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26

3See, e.g., April 5, 2011 Proxy Statement ("Mr. Charney founded the Company

27 [and] is considered intimately connected to American Apparel's brand identity.")

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1 practices and disregard for the law are also intimately tied to Charney who, during the

2 Class Period, almost single-handedly ruined American Apparel through a mixture of

3 hubris, highly inappropriate conduct and the' egregious federal securities laws

4 violations giving rise, not only to this complaint, but also several ongoing parallel

5 criminal federal investigations into Defendants' Class Period wrongdoing .4 In fact, in

6 a New York Times article appearing after the Class Period, even Keith Miller, a current

7 member of the Company's own Board of Directors ("Board"), Audit Committee and

8 Chairman of the Compensation Committee, lamented the "erosion" Charney's

9 reckless behavior had caused the Company's shareholders. Indeed, by the last day of

10 the Class Period, the Company's share price traded at approximately $1.03 from an

11 artificially inflated Class Period high of approximately $15.60.

12 8. Charney has long been outspoken about immigration and labor reform

13 and, more specifically, amnesty for undocumented workers in Los Angeles where the

14 Company's factory and headquarters are based. Charney's rhetoric, however, is to

15 this day simply an elaborate advertising campaign for the Company's brand. For

16 instance, in a pre-Class Period article entitled "Employer is for Open U.S. Door," that

17 ran in the Los Angeles Times on April 20, 2006 (while American Apparel was still

18 private), Charney boasted, with respect to the Company's immigrant employment

19 practices, it "[d]oesn't matter what the [1-9] documents say, they're American

20 workers .... If you ask me to speculate, I think over 50% of the workers in my industry

21

22

234 On August 9, 2010, the Equal Employment Opportunity Commission

24 ("EEOC") expanded the scope of an existing sexual harassment investigation of25 Charney to include other employees who, according to a Company filing with the

SEC, "may have been sexually harassed." On August 9, 2010, the EEOC issued a26 written determination to the Company that a "reasonable cause exists to believe the

Company discriminated against Q women, as a class, on the basis of their female27 gender, by subjecting them to sexual harassment." See also, n.14, infra.

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i Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page IDi #:1189

1 are falsely documented ... I think we have to have wholesale amnesty, one shot. I

2 don't believe in any restrictions on exit or entry to the United States."

3 9. On February 10, 2007, Barack Obama announced his candidacy for the

4 presidency of the United States. Throughout his campaign, Obama promised to

5 provide a path to citizenship for America's roughly 12 million undocumented

6 immigrants. Expectedly, given American Apparel's large, undisclosed undocumented

7 workforce, Charney expressed similar views. For example, in a December 2007 New

8 York Times ad, American Apparel advertised that "[o]ver 12 million human beings

9 have become integral to our society, economy and culture here in the USA, yet theyi

10 do so in legal purgatory... the only realistic option is some form of legal integration,

11 coupled with legitimate, forward-thinking immigration policy." Similarly, in a

i 12 January 18, 2008 New York Times article Charney stated, with certain flair, that

13 amnesty for undocumented workers "is at the core of my company, at the core of my

14 soul." In truth, Charney's amnesty narrative was simply effective commercial brand

15 advertising.

16 10. Although Charney may have once successfully exploited immigration

17 reform to cultivate American Apparel's "brand" when the Company was still

18 privately-held, once he and Kowalewski voluntarily chose to tap the public capital

19 markets by taking American Apparel public on December 12, 2007, they were

20 required under the federal securities laws to speak truthfully to American Apparel's

21 shareholders and the broader market about the Company's immigration law scheme.

22 By the start of the Class Period, however, Charney found himself conflicted: either

23 voluntarily self-report that thousands of American Apparel's employees were

24 undocumented, risk damaging the brand by terminating those workers and face

25 possible federal sanctions, or mislead investors about American Apparel's purported

26 immigration compliance hoping that a new administration would ameliorate the

27 dilemma for him. Charney recklessly chose the latter.

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1 11. In December 2007, Charney took American Apparel public. At

2 Kowalewski's urging, Charney did so, not through a typical initial public offering

3 ("IPO") (which would have required making detailed financial and other disclosures

4 with the SEC), but through an unusual "blank check" reverse merger with Endeavor

5 Acquisition Corp. ("Endeavor"). The merger immediately transformed American

6 Apparel into a publicly-traded company and made Charney a highly-paid public CEO,

7 earning over $16 million in 2007 alone, and giving him an instant reported net worth

8 of over $580 million. While Defendants certainly enjoyed the financial rewards of

9 going public, they, like their blatant violations of U.S. immigration laws, utterly

10 ignored their new corresponding federal securities laws responsibilities to the

11 Company's shareholders .5

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12 12. Defendants not only misled their own shareholders and the broader

13 market about these and other facts but even their own independent auditor — Deloitte

14 & Touche LLP ("Deloitte"). As a result, during the Class Period, Deloitte abruptly

15 resigned as the Company's independent auditor stating that it was "no longer willing

16 to rely on management's representations due to Deloitte's belief that management

17 withheld from Deloitte the February 2010 monthly financial statements until after the

18 filing of the 2009 10-K and made related misrepresentations." Shortly thereafter, the

19 Federal Bureau of Investigation ("FBI"), Department of Justice ("DOJ") and SEC

20 commenced simultaneous civil and criminal investigations into Deloitte's resignation

21 and the Company's Class Period financial reporting and internal controls. The

22 investigations are ongoing.

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25 S In a 2003 profile in the Los Angeles Times, Charney was described as living in amodest, two-bedroom house in Echo Park, a working-class Los Angeles

26 "neighborhood. Five years later, after American Apparel went public, Charney hadtraded in his modest home for a 20-room "gated, marble, gold-encrusted mansion on a

27 hill."

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1 13. On June 30, 2009, American Apparel revealed in a Form 8-K (without an

2 accompanying press release) that U.S. Immigration and Customs Enforcement

3 ("ICE") had discovered what ICE later characterized as a "scheme" by the Company

4 to violate U.S. immigration laws, including the fact that one-third of the Company's

5 Los Angeles-based manufacturing employees (i.e., approximately 1,800 people) were

6 not authorized to work in the U.S. The Company later revealed that, in fact, 2,500 of

7 the Company's garment manufacturing employees had been dismissed. This

8 revelation directly contradicted Defendants' unequivocal prior statements that all of

9 the Company's manufacturing employees were "documented immigrants and

10 authorized to work in the United States." In response to this news, the Company's

11 stock price tumbled approximately 16% on unusually heavy trading volume. The

12 Company share price would have fallen even further had Defendants not also

13 misleadingly insisted, in the same Form 8-K, that it "is the Company's policy, and

14 has been at all times, to fully comply with its obligations to establish the employment

15 eligibility of prospective employees under immigration laws."

16 14. Following the Company's negative June 30, 2009 and July 1, 2009 partial

17 disclosures, Defendants embarked on yet another fraudulent campaign (i.e., a cover

18 up) to assure by now understandably jittery investors that "even if the Company were

19 to lose substantially all of the 1,800 identified employees (which represent

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

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

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

23 financial results." This was deliberately misleading. The Company was not, in fact,

24 "at all times [] fully comply[ing] with its obligations to establish the employment

25 eligibility of prospective employees under immigration laws," and the terminations

26 did have a materially adverse impact on the Company's vertically-integrated

27 operations. In fact, to this day, the Company is still reeling from the effects of the

28 terminations.

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1 15. Initially, Defendants' efforts to deceive investors about the impact of the

2 firings were effective. For example, after a meeting with Charney on July 1, 2009,

3 KeyBanc Capital Markets analyst Edward Yruma noted in a research report that

4 "[maanagement was clear in emphasizing that even if a significant number of the

5 1,800 employees are deemed ineligible to work, the Company should not see a

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

7 should be able to replace workers." As alleged herein, however, the Company has

i8 had significant difficulty replacing the undocumented workforce that, unbeknownst to

9 investors, it had so heavily depended on during the Class Period.

10 16. Then, a New York Times article dated September 30, 2009, titled

11 "Immigration Crackdown Leads to 1,800 Pink Slips," observed that:

12 The employees being fired from American Apparel could not resolve

13 discrepancies that investigators discovered in documents they had

14 presented at hiring and in federal Social Security or immigration records

15 —probably because the documents were fake. Peter Schey, a lawyer for

916 American Apparel, said that ICE had cited deficiencies in the company's

17 record keeping, but that the authorities had not accused it of knowingly

18 hiring illegal workers. A fine threatened by the agency was withdrawn,

19 Mr. Schey said.

20 17. Peter Schey's ("Schey") statement was false. In fact, the fine had not

21 been withdrawn. In a November 10, 2009 Quarterly Report on Form 10-Q ("3Q09

22 10-Q") filed with the SEC, less than two weeks after the September 29, 2009 New

23 York Times article ran, the Company buried an admission deep in the voluminous

24 3 Q09 10-Q that, in fact, "[i]n the fourth quarter of 2009, as a result of the inspection,

25 the Company was fined by ICE." Then, in October 2009, Charney lashed out against

26 the Obama administration for the ICE enforcement action, in an entry to his personal

27 blog called "To All Employees: A Message About Immigration from Dov":

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iCase 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID

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1 As you know, American Apparel has found itself in the center of a shift

2 in immigration policies from the Bush to Obama administrations.

3 Although the current administration has moved away from I.C.E. Raids,

4 the nearly 2,000 hardworking American Apparel employees affected can

5 tell you the new policies are anything but fair. Because of a broken

6 system, we were forced to let go of many factory workers — people who

7 have been part of our family for nearly 10 years — and the country

i

8 seems further from addressing this issue than ever.

9 18. In other words, while the Obama administration had made a progressive

10 policy decision to shift away from raiding businesses searching for possible

11 undocumented workers to arrest or deport, to penalizing employers who "knowingly"

12 violated U.S. immigration laws, because Charney's business suffered, he was blinded

13 to the fact that the shift was actually a positive, incremental development for the

14 migrant workers Charney purportedly championed. Indeed, as alleged herein,

15 Charney's entire "pro-immigrant" and "pro-employee narrative" is a mirage. Stripped

16 of the mostly undocumented immigrant manufacturing workforce that the Company

17 depended on so heavily to produce its garments domestically, American Apparel, just

!j 18 like most other large clothing retailers, was now threatened with possibly having to

19 manufacture its garments overseas. To have done so, however, would have

20 immediately and irreparably eviscerated the Company's purported competitive "Made

21 in the U.S.A." brand advantage. In the fiercely competitive commercial clothing retail

22 industry, losing its misleading "Made in the U.S.A ." brand advantage would mean

23 possible ruin for the Company.

24 19. Then, on a November 10, 2009 conference call with analysts, four full

25 months after the ICE enforcement action results were first disclosed, then-CFO

26 Kowalewski misleadingly shrugged off an analyst question about the implications of

27 ICE's enforcement action, saying "I think what we said back in July [2009] when we

28 had this issue was we didn't think it [ICE enforcement action] was going to have a

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1 material impact to our financial results." During the same call, Kowalewski then also

2 falsely characterized the loss of the Company's manufacturing employees as a

3 competitive advantage that would result in lower costs, explaining that "because we

i 4 had been operating with a higher number of workers than maybe we would have

5 needed under normal circumstances. So we do think some of the head count has

6 improved our overhead situation." During the same call, Charney chimed in that he

7 "agree[d] with what Adrian [Kowalewski] said. But I also, [k]now that we have the

8 stability in the workforce at the factory level, in July [2009], we knew we were going

t 9 to have to lose some people." As the Company would later admit, however, things

E 10 were anything but "stable" at the very factory where Charney's own office was

11 located and where he spent "about 50 hours a week."

I 12 20. On May 19, 2010, the Company revealed awful, unexpected news — gross

13 margins for the Company's first quarter 2010 had been negatively impacted by

14 reduced labor efficiency at the Company's Los Angeles production facilities.

15 Defendants also disclosed that 1,500 experienced manufacturing employees had, in

16 fact, been dismissed in the third and fourth quarters of 2009 following the completion

17 of an ICE inspection. The Company further revealed that the impact of the lower

18 manufacturing efficiency would be a reduction of net income by $4.4 million, and that

19 the reduced efficiency could impact financial results into 2011. The Company also

20 explained that the "reduction in labor efficiency was a result of the dismissal of over

21 1,500 experienced manufacturing employees in the third and fourth quarters of 2009

22 following the completion of an 1-9 inspection by U.S. Immigration and Customs

23 Enforcement."

24 21. On a same-day conference call following the Company's damaging May

- 25 19, 2010 press release, Charney conceded the utter absence of factory employee

26 "stability" that both he and Kowalewski had touted just months earlier (see ¶19,

27 supra):

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1 We didn't move quickly enough after we had the immigration

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

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

4 get back on our game as far as — in a way the fact that we had this Made

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

6 we don't have enough people.

7 22. Upon the release of this news, which starkly contradicted Defendants'

8 prior statements that the terminations had "improved [] overhead" and that there was

9 "stability in the workforce," shares of the Company's stock plunged 40.51 %, to close

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

'r 11 resigned as the Company's auditor shortly after the announcement, on July 22, 2010.

12 23. Then, on August 17, 2010, the Company announced in a press release on

13 Form 8-K that the Company would report a loss from operations of $5 million to $7

14 million for the quarter. Again, one of the primary reasons cited for the loss was

15 "lower labor efficiency at the Company's production facilities," which was the direct

16 result of both the mass workforce terminations and the replacement hiring of over

17 1,600 net new manufacturing workers during the second quarter of 2010. Further, the

18 Company disclosed that it might not have sufficient liquidity necessary to sustain

19 operations for the next twelve months, and that there existed "substantial doubt that

20 the Company will be able to continue as a going concern." On this news, shares of the

21 Company's stock tumbled 25.9%, to close on August 17, 2010 at $1.03 per share, on

22 heavy trading volume. As the market continued to digest this news, the Company's

23 stock fell an additional 27.2%, to close on August 19, 2010 at approximately $0.75 per

24 share, on unusually heavy trading volume.

25 24. Defendants' immigration compliance scheme, however, is only part of

26 what investors learned was a culture of corruption festering at the Company during the

27 Class Period.

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1 The Deloitte Debacle

2 25. Only a few short months after taking American Apparel public on

3 December 12, 2007, Charney's reckless approach to running his new publicly-traded

4 company began to manifest itself. Ina now-infamous March 20, 2008, interview with

5 the Wall Street Journal, Charney publicly humiliated his then-current CFO, Ken

6 Cieply ("Cieply"), saying Mr. Cieply had "no credibility" and was a "complete loser."

7 The very next day, Charney reversed course, calling his words "juvenile" and

8 apologized in a letter to the Wall Street Journal, writing that Mr. Cieply had

9 "enormous credibility." To market observers, however, Charney's public attack on

10 the Company's CFO was astonishing, not only because of the reputational harm it

11 caused the Company, but because Mr. Cieply's 2007 base salary had just been

12 increased by 20%. Not surprisingly, Mr. Cieply quit a short time later. He would not

13 be the last to leave.

14 26. In a press release on Form 8-K dated December 31, 2008, the Company

15 announced that it had replaced Mr. Cieply with Kowalewslci. Kowalewslci succeeded

16 William T. Gochnauer, who had served as the Company's Interim CFO (replacing Mr.

17 Cieply) since May 22, 2008. Kowalewslci initially joined the Company in 2006 as an

18 intern and had previously been the Company's Director of Corporate Financing and

19 Development. Kowaleski was promoted to CFO of American Apparel at the age of 31

20 and he earned his Masters of Business Administration degree in 2006 — a mere two

21 years before becoming CFO. Charney's promotion of the sorely untested and

22 inexperienced Kowalewski to replace Mr. Cieply was deliberate. With an

23 inexperienced CFO like Kowalewslci now overseeing American Apparel's books,

24 Charney enabled himself to continue to manage the Company's finances and other

25 operations with little oversight or accountability. This would turn out to have

26 disastrous consequences for the Company's shareholders. Kowalewslci was finally

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Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86' Page ID#:1197

1 ousted as CFO and replaced by John J. Luttrell ("Luttrell"), an experienced retail

2 CFO, in February 2011.

3 27. Then, on a May 13, 2008 conference call for 1Q08 after the Wall Street

4 Journal "loser" article appeared, Charney retreated, assuring investors that the

5 Company was "looking to build a world class financial team. We want to — we have a

6 very creative company and a creative brand, but we want to pursue a strict corporate

7 orthodoxy as far as financial accounting issues and putting together a team." But

8 this, too, was false. Despite Defendants' representations to the contrary, Defendants

9 knew that American Apparel's financial accounting practices were anything but

10 "strict," and that the Company's internal controls were virtually non-existent. This

11 would only worsen with Kowalewski — far from a "world class" financial executive —

12 as CFO. Internal Company e-mails highlight American Apparel's shabby controls and

13 financial team.

14 28. On January 7, 2009, the CBSBusiness News Interactive Network reported

15 that, on December 24, 2008, Kowalewski, had sent the Company's head of public

16 relations, Ryan Holiday, a series of e-mails. A copy of the e-mails was furnished to

17 the Los Angeles Times which ran an article on March 14, 2009 reporting on their

18 contents. The e-mails had earlier been leaked to a website which ran a story called

19 "American Apparel's Internal `Bankrupt' Emails." In response to the e-mail leak, it

20 was divulged that the Company reported a December 24, 2008 break-in to its

21 computer systems to local authorities. Moreover, reportedly, the Company's then

22 General Counsel (and present Chief Litigation Counsel), Joyce Crucillo, without

23 denying the accuracy of the e-mails, meekly stated that American Apparel's "position

24 is that those are unauthenticated e-mails." Holiday also reportedly commented on the

25

26

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1 leaked e-mails (albeit less formally) via an e-mail he shot off to the writer of the

2 website story, writing "I'd print the stolen emails if I had them too I guess." 6

3 29. The e-mails are damning. In the opening e-mail, Holiday seeks

4 Kowalewski's assistance responding to an upcoming (and potentially damaging) news

5 story about American Apparel. Kowalewski responds to Holiday's request saying that

6 he did not have time to help with the story on Christmas Eve because, among other

7 things, "1. We [American Apparel] almost went bankrupt last Friday. I'm sorry but

8 1 was busy with that for the past several weeks. 2. I've been sick and occupied with

9 other company matters since Friday because we're hardly out of the woods on #1

10 [i.e., bankruptcy]."

11 30. American Apparel itself, however, had never previously publicly

12 disclosed that the Company was on the verge of bankruptcy at that point during the

13 Class Period. To the contrary, during the Company's November 10, 2008 conference

14 call with investors the previous month, Charney trumpeted the Company's financial

15 health, claiming "[w]e're confident in the numbers we've put out there, that's for

16 sure." As expected, investors and analysts relied upon the Company's CEO's assured

17 and unequivocal statements. For instance, on November 11, 2008, Mickey M.

18 Schleien, an analyst with Ladenburg Thalmann & Co. Inc. ("Ladenburg"), maintained

19 his "Buy" rating for the Company stating that "yesterday evening [on the conference

20 call], APP reported operating results a bit better than expected."

21 31. A KeyBanc Capital Markets report dated April 22, 2009, highlighted that

22 the Company was "[c]ommitted to bestpractices. The question was asked about what

23 management views as a Street misperception about the Company, to which

24 management highlighted the flawed view that the Company is disorganized and

25

26The e-mails copy Candace Keene who, according to publicly-available

27 information, has worked at American Apparel since September 2008.

28

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I unsystematic internally. Charney emphasized the Company's commitment to

2 conservatism and maintaining best practices." In response to this news, the

3 Company's stock price jumped 7.66%. To further assure investors about the

4 Company's controls and financial reporting, Defendants hired Deloitte as the

5 Company's new independent auditor in the spring of 2009.

6 32. Throughout 2009 and early 2010, the market responded positively to

7 American Apparel's publicly-reported financial performance. The Company was oft-

8 described as one of the few retailers purportedly "[b]ucking the trend" during the

9 global economic slowdown. A February 23, 2009 article in trade magazine

10 Advertising Age described American Apparel as the "[b]est-positioned" apparel

11 retailer in the world. On a March 17, 2009 conference call with investors, Charney

12 even touted the Company's ability to weather the economic downturn, trumpeting that

13 "we feel our brand and the market segment we serve will allow us to weather the

14 economic storm well."

15 33. During the same March 17, 2009 call, Todd Slater, an analyst for Lazard

16 Capital Markets, relayed positive market sentiment about the Company, stating "first

17 of all, let me congratulate you for hitting numbers that you have guided to over a

18 year ago when the world was a very, very different place. I also think you may be the

19 only retailer guiding to an increase in revenue in `09 as well as an expansion in

20 operating margins and an increase in earnings. You are in a pretty elitegroup there."

21 In fact, like the Company's purported compliance with immigration enforcement, it

22 was all a sham. A short time later, in May 2009, the Company was forced to restate

23 its 2008 financial statements.

24 34. On July 28, 2010, Defendants suddenly announced that, effective July 22,

25 2010, Deloitte had resigned (noisily) as the Company's independent auditor. Without

26 elaborating, Defendants advised investors that Deloitte had resigned because "certain

27 information had come to Deloitte's attention that if further investigated may

28 materially impact the reliability of either its previously issued audit report or the

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1 underlying consolidated financial statements for the year ended December 31, 2009

2 included in the Company's 2009 Form 10-K." Deloitte also later withdrew its audit

3 for all of the Company's 2009 financial statements, warning investors that they should

4 "no longer be relied upon." On this news, the Company's stock price fell 14.36% on

5 unusually heavy volume.

6 35. Then, on August 17, 2010, the Company was forced; to disclose that

7 Defendants had received a grand jury subpoena dated July 30, 2010 (i.e., a week after

8 Deloitte quit) from the DOJ for the production of documents relating to the

9 circumstances surrounding the Deloitte resignation and a related inquiry from the SEC

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

11 Apparel had also received a subpoena from the U.S. Attorney's Office for the Central

12 District of California for documents relating to an official criminal investigation being

13 conducted by the FBI into Deloitte's resignation and the Company's financial

14 reporting and internal controls, and a subpoena from the SEC for documents relating

15 to its, now, formal investigation surrounding Deloitte's resignation and the

16 Company's financial reporting and internal controls. Reacting to this news, on August

17 19, 2010, retail trade publication Women's Wear Daily ("WWD") quoted an

18 experienced corporate lawyer who observed that "` [a]nytime auditors step back,

19 you've really got to take a hard look at whether there was fraud."' In response to

20 this and other same-day negative announcements, the Company stock price fell over

21 46% between August 16 and August 19, 2010 as the market digested the full impact of

22 these adverse disclosures.

23 36. After the Class Period, on December 21, 2010, the Company belatedly

24 provided additional facts about the reasons for Deloitte's resignation. The Company

25 disclosed that its Audit Committee received notice that Deloitte's resignation was

26 motivated by Deloitte's "professional judgment" that it was "no longer willing to rely

27 on management's representations due to Deloitte's belief that management withheld

28 from Deloitte the February 2010 monthly financial statements until after the filing of

-16-


1 the 2009 10-K and made related misrepresentations." In other words, Deloitte

2 resigned as the Company's independent auditor, reported Defendants to federal

3 authorities and withdrew its audit for the Company's 2009 financial statements

4 because Deloitte could no longer credibly assure investors that Defendants had not

5 committed accounting fraud. And, indeed, by being accused of withholding financial

6 statements by Deloitte, Defendants' conduct was not just alleged to be reckless, but

7 intentional.

8 37. Finally, on March 31, 2011 American Apparel filed its long-awaited and

9 delayed Annual Report on Form 10-K with the SEC ("2010 Annual Report"). With a

10 new, experienced CFO (Mr. Luttrell) at the helm, the 2010 Annual Report admitted a

11 litany of troubling irregularities that existed at American Apparel during the Class

12 Period. First, the 2010 Annual Report included its new auditor's "adverse opinion

13 on the effectiveness of the Company's internal control over financial reporting

14 [during the Class Period] because of the existence of material weaknesses [at the

15 Company]. "8 The adverse opinion concluded that, during the Class Period: (i) "the

16 company did not maintain an adequate control environment that fully emphasized the

17 establishment of, adherence to, or adequate communication regarding appropriate

18 internal control over financial reporting;" and (ii) "the Company did not perform

19 adequate independent reviews and maintain effective controls over the preparation of

20 financial statements." In addition, the 2010 Annual Report repeatedly emphasized

21 that "[i]f American Apparel is unable to successfully implement steps to improve its

22

23

24 7 Knowingly misleading an auditor carries criminal penalties under 15 U.S.C.25 §78ff and civil penalties under the Sarbanes-Oxley Act of 2002 ("SOX").

26 8 Its new auditor, Marcum LLP, was previously fired as the Company'sindependent auditor in April 2009 after disclosing "material weaknesses" in American

27 Apparel's internal control over financial reporting.

28

-17-


1 liquidity position, it may need to voluntarily seek protection under Chapter 11 of the

2 U.S. Bankruptcy Code."

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

4 Lion Capital, a sophisticated British private investment fund that loaned the

5 Company $80 million in March 2009, had unceremoniously yanked its two

6 designated directors (who were simultaneously Lion Capital partners) — Lyndon Lea

7 ("Lea") and Neil Richardson ("Richardson") — from American Apparel's Board. For

8 investors, however, Lion Capital's belated attempt to distance itself from Defendants

9 was too little, too late. After the removal of Lion Capital's directors from the Board,

10 Defendants have admitted that Lea and Richardson were removed to eliminate

11 "conflicts of interest" created by Lion Capital's role as a lender and creditor to the

12 Company during the Class Period. In 2010, American Apparel lost approximately

13 $86 million.

14 JURISDICTION AND VENUE

15 39. The claims asserted herein arise under and pursuant to § § 10(b) and 20(a)

16 of the Exchange Act, (15 U.S.C. §§78j(b) and 78t(a)) and Rule lOb-5 promulgated

17 thereunder (17 C.F.R. §240.1Ob-5).

18 40. This Court has jurisdiction over the subject matter of this action pursuant

19 to §27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. §1331.

20 41. Venue is proper in this District pursuant to §27 of the Exchange Act, 15

21 U.S.C. §78aa and 28 U.S.C. §1391(b). Many of the acts and transactions alleged

22 herein, including the preparation and dissemination of materially false and misleading

23 information, occurred in substantial part in this District. Additionally, American

24 Apparel's principal executive offices are located within this District.

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

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

27 interstate commerce.

28

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. Case 2:10- cv-06352-MM M - JCG Document 66 Filed 04/29/1 1 of 86 Page ID#:1203

1 THE PARTIES

2 43. Lead Plaintiff, Charles Rendelman, as detailed in the Certification of

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

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

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

6 thereby.

7 44. Defendant American Apparel is a Delaware corporation with its principal

8 executive offices located at 747 Warehouse Street, Los Angeles, California 90021.

9 45. Defendant Charney was, at all relevant times, the Company's President,

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

11 director and founder of American Apparel's predecessor, Old American Apparel, as

12 well as its predecessor companies dating back to 1989. As CEO, Charney was

13 responsible for and signed Company filings with the SEC, including the May 16, 2008

14 Form 10-Q ("1Q08 10-Q"); the August 15, 2008 Form 10-Q ("2Q08 10-Q"); the

15 November 10, 2008 Form 10-Q ("3Q08 10-Q"); the 2008 Form 10-K ("2008 Annual

16 Report"); the April 29, 2009 Proxy. Statement; the June 30, 2009 Form 8-K; the

17 August 13, 2009 Form 10-Q (" 1 Q0910-Q"); the August 17, 2009 Form 10-Q ("2Q09

18 10-Q"); the September 11, 2009 Proxy Statement; the 3Q0910-Q; the 2009 Form 10-

19 K ("2009 Annual Report"); the October 15, 2010 Proxy Statement and the 2010

20 Annual Report.

21 46. Defendant Kowalewski was, at relevant times, the Company's Executive

22 Vice President and CFO, as well as a Director. Kowalewski served as the Company's

23 Director of Corporate Finance and Development from 2006 through December 2008.

24 As CFO, Kowalewski was responsible for and signed Company filings with the SEC,

25 including the 2008 Annual Report, the 1Q09 10-Q, the 2Q09 10-Q, the 3Q09 10-Q,

26 the 2009 Annual Report, the May 11, 2010 Form NT 10-Q, the May 19, 2010 Form 8-

27 K and the July 28, 2010 Form 8-K.

28

-19-


1 47. Defendants Charney and Kowalewski are collectively ' referred to

2 hereinafter as the "Individual Defendants." The Individual Defendants, because of

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

4 contents of American Apparel's reports to the SEC, press releases and presentations to

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

6 market. Each Individual Defendant was provided with copies of the Company's

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

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

9 them to be corrected.

10 Individual Defendants' Duties

11 48. The Individual Defendants owed American Apparel shareholders the

12 duty to exercise care and diligence in the management and administration of the

13 affairs of the Company. By reason of their positions as officers and directors of

14 American Apparel and because of their ability to control the business and corporate

15 affairs of the Company, the Individual Defendants owed American Apparel

16 shareholders an absolute obligation of candor. As officers of a publicly-held

1 7 company, the Individual Defendants had a duty to promptly disseminate accurate and

18 truthful information with respect to the Company's operations, finances and

1 9 compensation practices.

20 49. To discharge their duties, the Individual Defendants were required to

21 exercise reasonable and prudent supervision over the management, policies, practices

22 and controls of American Apparel's business and financial affairs. By virtue of such

23 duties, the Individual Defendants were required to, among other things:

24 W manage, conduct, supervise and direct the business affairs of

25 American Apparel in accordance with applicable federal law, government rules

26 and regulations;

27

28

-20-


1 (ii) not permit any officer, director or employee of American Apparel

2 to engage in self-dealing, insider trading or stock manipulation;

3 (iii) not permit any officer, director or employee of American Apparel

4 to violate applicable laws, rules and regulations;

5 (iv) remain informed as to the status of American Apparel's

6 operations, including its practices in relation to financial statement preparation

7 and internal financial, accounting and disclosure controls, and upon receipt of

8 notice or information of imprudent, improper or unsound practices, to make

9 inquiry in connection therewith, and to take steps to correct such conditions or

10 practices and make such disclosures as are necessary to comply with the federal

11 securities laws and their duty of candor to the Company's shareholders;

i

12 (v) establish and maintain systematic and accurate records and

13 reports of the business and affairs of American Apparel and procedures for the

14 reporting to the Board and to periodically investigate, or cause independent

15 investigation to be made of, said reports and records;

16 (vi) maintain and implement an adequate, functioning system of

17 internal legal, financial, disclosure and accounting controls, such that American

18 Apparel's financial statements would be accurate and in accordance with

19 applicable laws;

20 (vii) exercise control and supervision over the public statements to the

21 securities markets by the officers and employees of American Apparel; and

22 (viii) supervise the preparation and filing of any financial reports or

23 other information required by law from American Apparel and to examine and

24 evaluate any reports of examinations, audits or other financial information

25 concerning the financial affairs of American Apparel and to make full and

26 accurate disclosure of all material facts concerning, inter alia, each of the

27 subjects and duties set forth above.

28

-21-


1 50. The Individual Defendants substantially participated in the issuance

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

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

4 Individual Defendants, because of their positions with the Company, possessed the

5 power and authority to control the contents of American Apparel's Proxy Statements,

6 quarterly reports, press releases, SEC filings and presentations to securities analysts,

7 money and portfolio managers, news reporters and investors, i.e., the market. They

8 were provided with copies of the Company's reports, Proxy Statements, SEC filings

9 and press releases alleged herein to be misleading prior to or shortly after their

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

11 be corrected.

12 51. The Individual Defendants were keenly aware of their obligations to

13 comply with applicable laws and to disclose the truth about American Apparel

14 because these requirements are detailed in American Apparel's own Code of Ethics,

15 which (on information and belief) existed in its current form throughout the Class

16 Period and states in pertinent part:

17 1. Introduction

18 The Board of Directors of American Apparel, Inc. has adopted this code1

19 of ethics (the "Code"), which is applicable to all directors, officers and

20 employees, to:

21 • promote honest and ethical conduct, including the ethical handling of

22 actual or apparent conflicts of interest between personal and professional

23 relationships;

24 • promote the full, fair, accurate, timely and understandable disclosure

25 in reports and documents that the Company files with, or submits to,

26 the Securities and Exchange Commission (the "SEC'), as well as in

27 other public communications made by or on behalf of the Company;

28

-22-


1 • promote compliance with applicable governmental laws, rules and

2 regulations;

3 • deter wrongdoing; and

4 • require prompt internal reporting of breaches of, and accountability

5 for adherence to, this Code.

6

7 2. Honest, Ethical and Fair Conduct

8 Each person owes a duty to the Company to act with integrity. Integrity

9 requires, among other things, being honest, fair and candid. Deceit,

10 dishonesty and subordination of principle are inconsistent with integrity.

11 Service to the Company never should be subordinated to personal gaini

12 and advantage.

13 Each person must:

14 Act with integrity, including being honest and candid while still

15 maintaining the confidentiality of the Company's information where

16 required or in the Company's interests.

17 • Observe all applicable governmental laws, rules and regulations.

18 • Comply with the requirements of applicable accounting and auditing

19 standards, as well as Company policies, in order to maintain a high

20 standard of accuracy and completeness in the Company's financial

21 records and other business-related information and data.

22

23 • Avoid conflicts of interest, wherever possible, except under guidelines

24 or resolutions approved by the Board of Directors (or the appropriate

25 committee of the Board). Anything that would be a conflict for a person

26 subject to this Code also will be a conflict if it is related to a member of

27 his or her family or a close relative. Examples of conflict of interest

28 situations include, but are not limited to, the following:

-23-


1 ^ ^

2 • being in the position of supervising, reviewing or having any influence

3 on the job evaluation, pay or benefit of any close relative....

4

5 3. Disclosure

6 The Company strives to ensure that the contents of and the disclosures in

7 the reports and documents that the Company files with the SEC andi8 other public communications shall be full, fair, accurate, timely and

9 understandable in accordance with applicable disclosure standards,

10 including standards of materiality, where appropriate. Each person must:

11 • not knowingly misrepresent, or cause others to misrepresent, facts

12 about the Company to others, whether within or outside the Company,

13 including to the Company's independent auditors, governmental

14 regulators, self-regulating organizations and other governmental

15 officials, as appropriate; and

16 • in relation to his or her area of responsibility, properly review and

17 critically analyze proposed disclosure for accuracy and completeness.

18 In addition to the foregoing, the Chief Executive Officer and Chief

19 Financial Officer of the Parent and each subsidiary of Parent (or persons

20 performing similar functions), and each other person that typically is

21 involved in the financial reporting of the Company must familiarize

22 himself or herself with the disclosure requirements applicable to the

23 Company as well as the business and financial operations of the

24 Company.

25 Each person must promptly bring to the attention of the Chairman of the

26 Audit Committee of Parent's Board of Directors (or the Chairman of the

27 Parent's Board of Directors if no Audit Committee exists) any

28 information he or she may have concerning (a) significant deficiencies in

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Case 2:10- cv-06352-MMM - JCG Document 66 Filed 04/29/11 of 86 Page ID#:1209

1 the design or operation of internal and/or disclosure controls which could

2 adversely affect the Company's ability to record, process, summarize

3 and report financial data or (b) any fraud, whether or not material, that

4 involves management or other employees who have a significant role in

5 the Company's financial reporting, disclosures or internal controls.

6 4. Compliance

7 It is the Company's obligation and policy to comply with all applicable

8 governmental laws, rules and regulations. It is the personal

9 responsibility of each person to, and each person must, adhere to the

10 standards and restrictions imposed by those laws, rules and regulations,

11 including those relating to accounting and auditing matters.

12 52. The Individual Defendants knew that the adverse facts alleged herein had

13 not been disclosed to, and were being concealed from the public, and that the positive

14 representations made to investors were then materially false and misleading. The

15 Individual Defendants are liable for the false statements pleaded herein, as those

16 statements were each "group-published" information, the result of the collective

17 actions of the Individual Defendants.1

18 Lion Capitali19 53. Lion Capital is a limited liability partnership with various investment

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

21 Place, London, SW1X 7HF. Lion Capital's United States affiliate (Lion Captial

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

23 10019. Lion Capital purports to be a recognized leader in investing in consumer

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

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

26 were simultaneously partners of Lion Capital and members of American Apparel's

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

28

-25-


1 the power to director cause the direction of the management and policies of American

2 Apparel and the Individual Defendants.

3 BACKGROUND TO THE CLASS PERIOD

4 American Apparel's "Hustler"

5 54. In a "Corporate Governance" section of American Apparel's website, the

6 Company states that "American Apparel founder and Chief Executive Officer Dov

7 Charney is a self-described `hustler' and one of fashion's leading innovators."

8 Charney grew up in Westmount, a wealthy suburb of Montreal, Canada. He attended

9 the elite Choate Rosemary Hall high school in Connecticut and later, Tufts University.

10 After starting a (since-bankrupt) T-shirt company in South Carolina in 1989, Charney

11 founded American Apparel in 1998 as a California limited liability private company.

j 12 In September 2002, PR Week ran a profile piece on American Apparel that stated

13 "[e]verything about American Apparel, including its internal and external PR

14 practices, has been an organic extension of Charney's beliefs, visions, and

15 personality." Similarly, a January 12, 2003 Los Angeles Times article on aptly

16 observed that Charney had "successfully sold himself as a champion of better working

17 conditions in a county [i.e., Los Angeles] with 90,000 apparel workers." In October

18 2003, American Apparel opened its first retail store in Los Angeles.

19 55. Over the years, Charney's pro-employee "beliefs" have not gone

20 untested. A November 23, 2004 article by the New York Times entitled "Building a

21 Brand by Not Being a Brand," recounted that Unite (formerly the Union of

22 Needletrades, Industrial and Textile Employees) accused American Apparel of

23 blocking the unionization of its Los Angeles garment factory employees. In a

24 subsequent settlement with the National Labor Relations Board, the Company agreed

25 to place posters in its Los Angeles factory telling workers they had the legal right to

26 unionize.

27

28

-26-

1


. 1 56. Charney has also been named in myriad lawsuits by the Company's

2 female employees alleging sexual harassment. Over time, the fallout from the sexual

3 harassment lawsuits has taken its toll on one of the Company's most unique selling

4 points — that it is purportedly "pro-employee." In fact, Richard H. Koppes, a former

5 corporate lawyer and highly experienced and respected corporate governance expert,

6 once said in 2005 of the Company that "[i]t sounds like there's no adult presence at

7 that company....The workplace is not a playground." Mr. Koppe's observation wasi

8 prescient. In a sworn videotaped deposition transcript from one such sexual

9 harassment lawsuit in 2006, Charney, admitting the use of the term, audaciously

10 defended his use of the word "slut" to describe the Company's female employees,

11 testifying "[y]ou know, there are some of us that love sluts. You know, it's not

12 necessarily — it could [] also be an endearing term."

13 57. Because of his desire to continue business as usual and simultaneously

.14 retain control over the Company's affairs, Charney did not initially want to take

15 American Apparel public. In January 2006, The Guardian reported that, "Charney

16 seems to relish too much the control and the flexibility guaranteed by the absence of

17 shareholders to go public." By December 2006, however, WWD was reporting that

18 Charney "was nearly broke from financing the 150-store company since its inception."

19 To gain access to much needed capital (and personally enrich himself) Charney agreed

20 to a "blank check" reverse-merger with Endeavor. The move surprised the market.

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

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

23 company's eccentric founder, Dov Charney, who is known for exercising strict, and at

24 times controversial, control over the retailer's operations."

25 The Endeavor Merger

26 58. American Apparel was incorporated on July 22, 200 as Endeavor, a

27 "blank check" company formed to acquire an operating business. On December 21,

28

-27-


1 2005, Endeavor consummated its own IPO, and on December 18, 2006, entered into

2 an Agreement and Plan of Reorganization, amended November 7, 2007, with

3 American Apparel and its affiliated companies. Under the agreement, Charney was to

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

5 November 22, 2006, a letter of intent was executed by Endeavor and American

6 Apparel. The terms of the letter provided for the issuance to Charney of $190 million

7 of Endeavor stock valued at the time at $7.75 a share. In November 2007, the

8 transaction terms were amended to make them more favorable to Charney, including

9 increasing the number of shares to be issued to him and allowing Charney to remain

10 CEO of the Company. Charney also requested that the hiring of a Chief Operating

11 Officer and Chief Information Officer be waived as a condition to the closing.

12 Endeavor capitulated.

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

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

15 personal risk at the Company's expense. As Ladenburg reported on November 9,

16 2007, "[previously, Mr. Charney was to effect the buy-out himself and in the event

17 that he did not complete the purchase and Endeavor stepped in, then Mr. Chamey's

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

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

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

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

22 60. Critically, only a month before the transaction, Charney used Endeavor's

23 time-crunch (Endeavor's funds would be liquidated if the merger was not completed

24 by December 21, 2007) to pressure it into providing Charney with more favorable

25 terms. Under the terms of the revised deal, Charney received an additional five

26 million shares, worth over $77 million, giving him control of 54.3% of the Company.

27 Moreover, although Charney had previously nobly agreed to receive only a $1 salary,

28

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Case 2:10- cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1213

1 he pressured Endeavor into granting him a $750,000 salary with the potential for

2 added bonuses.

3 61. Ladenburg underwrote the Endeavor IPO, earning $1.825 million for its

4 work on the offering. In a June 26, 2007 analyst report initiating coverage on the

5 Company, Ladenburg gave Endeavor/American Apparel a "buy" rating, stating that

6 American Apparel "manufactures all its garments in the U.S., thus `American

7 Apparel.' Branding is edgy and youthful and in some instances reflects the

8 company's pro-employee strategy." On November 15, 2007, Ladenburg reiterated its

9 "buy" rating and raised its priced target from $14.00 per share to $16.00 per share

10 after reviewing the Company's updated Proxy Statement.9

11 62. Endeavor consummated the acquisition of American Apparel and its

12 affiliated companies on December 12, 2007 (the "Acquisition"). The same day,

13 American Apparel began trading on the American Stock Exchange. The Acquisition

14 was accounted for as a reverse merger for accounting and financial reporting

15 purposes, Endeavor was treated as the acquired company, and American Apparel was

16 treated as the acquiring company. Charney has served as Chairman, CEO, President

17 and a director of American Apparel since the consummation of the Acquisition on

18 December 12, 2007.

19 American Apparel

20 63. American Apparel's shares trade under American Stock Exchange

21 symbol "APP." The Company reports four operating segments — U.S. Wholesale,

22 U.S. Retail, Canada and International. The Wholesale segment consists of the

23

24 9 Mark D. Klein, an American Apparel director until June 17, 2009, was also25 Chairman of Ladenburg, a leading underwriter of blank check companies. From

March 2005 to September 2006, Klein was CEO and President of Ladenburg26 Thalmann Financial Services, Inc., the parent of Ladenburg and CEO of Ladenburg27 Thalmann Asset Management Inc., a subsidiary of Ladenburg Financial Services, Inc.

28

-29-


1 Company's wholesale operations and the Retail segment consists of the Company's

2 retail store operations in the United States, which were comprised of 160 retail stores

3 as of December 31, 2009. The Canada segment consists of the Company's retail,

4 wholesale and online consumer operations in Canada. The International segment

5 consists of American Apparel's retail, wholesale and online consumer operations

6 outside of the United States and Canada. American Apparel's primary manufacturing

7 facility is located in downtown Los Angeles where the "vertically-integrated"

8 Company employs thousands of people in the production of garments and shirts. The

9 Company's downtown Los Angeles facility also houses the Company's executive

10 offices, as well as cutting, sewing, warehousing and distribution operations.

j 11 64. The Company's SEC filings state that the Company has "established a

12 reputation with [its] customers, who are culturally sophisticated, creative, and

13 independent-minded .... [The Company's] stores are located in large metropolitan

14 areas, emerging neighborhoods, and select university communities." !ommunities. Consistent with

15 the Company's pro-labor branding, the Company's SEC filings promote the purported

16 fact that the Company views its retail and garment factory employees as:

17 [1]ong-term investments and adhere to a philosophy of providing

18 employees with decent working conditions in a technology-driven

19 environment which allows us to attain improved efficiency, while

20 promoting employee loyalty. We provide a compensation structure and

21 benefits package for manufacturing employees that includes above-

22 market wages, company-subsidized health insurance, free English

23 language classes, free massage, free parking, as well as other benefits.

24 We also provide for a well-lit working environment that is properly

25 ventilated and heated or cooled in our manufacturing facilities. These

26 working conditions, as well as compensation and benefits packages, are

27 key elements in achieving our desire to be an `employer of choice' in the

28 Los Angeles area. None of our employees are covered by a collective

-30-


1 bargaining agreement. We have never had a strike and we believe that

2 our relations with our employees are excellent.10

3 Employment Best Practices

4 65. The federal Immigration and Nationality Act ("INA") sets forth the

5 conditions for the temporary and permanent employment of all persons seeking

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

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

I 8 employers may only hire persons who may legally work in the U. S. Employers must

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

10 completing an Employment Eligibility Verification Form ("I-9"). An I-9 requires

11 employers to review and record a prospective employee's identity document(s) and

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

13 individual. Employers must keep each I-9 on file for at least three years, or one year

14 after employment ends, whichever is longer.

15 66. ICE is the principal investigative arm of the U.S. Department of

16 Homeland Security ("DHS") and the second largest investigative agency in the federal

17 government. Created in 2003 through a merger of the investigative and interior

18 enforcement elements of the U.S. Customs Service and the Immigration and

19 Naturalization Service, ICE has more than 20,000 employees in offices in all 50 states

20 and 47 foreign countries.

21 67. On its website, ICE advises all employers that diligent: hiring practices

22 include: (i) use E-Verify, the DHS employment eligibility verification program, to

23 verify the employment eligibility of all new hires; (ii) use the Social Security Number

24 Verification Service ("SSNVS") for wage reporting purposes. Make a good faith

25 effort to correct and verify the names and Social Security numbers of the current

26

27

2810 Cf. n.4 & ¶56.

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Case 2:10- cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1216

1 workforce and work with employees to resolve any discrepancies; (iii) establish a

2 written hiring and employment eligibility verification policy; (iv) establish an internal

3 compliance and training program related to the hiring and employment verification

4 process, including completion of Form I-9, how to detect fraudulent use of documents

5 in the verification process, and how to use E-Verify and SSNVS; (v) require the Form

6 I-9 and E-Verify process to be conducted only by individuals who have received

7 appropriate training and include a secondary review as part of each employee's

8 verification to minimize the potential for a single individual to subvert the process;

9 (vi) arrange for annual Form I-9 audits by an external auditing firm or a trained

10 employee not otherwise involved in the Form 1-9 process; (vii) establish a procedure

11 to report to ICE credible information of suspected criminal misconduct in the

12 employment eligibility verification process; and (viii) establish a tip line mechanism

13 (inbox, e-mail, etc.) for employees to report activity relating to the employment of

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

15 68. Given the forgoing, Defendants were clearly not "diligently" complying

16 with U.S. immigration laws or DHS "best practices." For instance, in a documentary

17 appearing on the Company's website entitled "Icing American Apparel" by Patrick

18 Burke in 2010, the Company reportedly stated that it did not plan to use E-Verify for

19 worksite enforcement. To the contrary, Charney randomly hired workers for the

20 Company's downtown Los Angeles factory. A former American Apparel Customer

21 Service Representative who worked at the Company's downtown Los Angeles factory

22 from late 2004 to May 2010, recalled being told that a new employee would be

23 working in his department. He was also told that Charney met the woman on the

24 street in downtown Los Angeles and offered her a job. According to the former

25 Customer Service Representative, the woman did not speak English and was scantily

26 clothed when she showed up for work. She was later sent to work in the Company's

27 Shipping Department.

28

-32-


1 American Apparel's manufacturing capabilities and harm American

2 Apparel's operations and financial results."

3 In January 2008, American Apparel was notified by the then-Bush led DHS that ICE

4 had commenced an audit of the Company regarding its compliance with immigration

deral securities law disclosure requirements (see5 laws, in violation of SEC and other fe

6 T¶86-87, 139, infra), the Company failed to promptly disclose this highly material

7 information in any SEC filing until four months later in the 1Q08 10-Q.

8 73. On March 17, 2008, the Company filed its 2007 Form 10-K with the SEC

9 on Form 14-A, which stated that "[t]he Company makes diligent efforts to comply

10 with all employment and labor regulations, including immigration laws. This

11 statement was false because Defendants were not following DHS "best practices" for

ra), and admittedly-failed-tolouse E-Verify during12 employment verification (see ¶67, inf

13 the Class Period to further ensure that the Company's large migrant workforce was

14 properly, documented. For a Company that depended so heavily on migrant labor to

15 promote its "Made in the U.S.A." brand, Defendants' failure to use E-Verify, among

16 other employment eligibility verification systems, invited the very risk that later

17 negatively materialized when ICE directed the Company to terminate one-third of its

18 downtown Los Angeles garment workforce. Not only did American Apparel fail to

19 put verification systems in place, its own CEO randomly hired people off the street for

20 American Apparel's Los Angeles garment factory (see ¶68, supra).'

21 74. More specifically, these statements misled the investing public because at

22 the time they were made Defendants knew, or were reckless in not knowing, that (i)

23 American Apparel employed 2,500 undocumented workers in a factory where the

24 Individual Defendants also worked; (ii) the Company's CEO hired people at random

25

26" The Company's 2008 Annual Report, filed with the SEC on March 16, 2009,

27 repeated this statement.

28

-35-


1 (see ¶68); (iii) the Company had virtually no verification systems in place to verify or

2 root out undocumented workers; and (iv) the undocumented workers were like

3 "family" to Charney who said he knew many of them for 10 years (see ¶¶17, 81).

4 Moreover, to conceal the thousands of undocumented workers from its vendors and

5 other sources of potential scrutiny, American Apparel utilized separate payroll

6 departments and systems for its factory versus retail/corporate employees.la

7 75. By this time, Senator Obama had announced his Presidential candidacy

8 and campaigned that, if elected, his administration would provide a path to citizenship

9 for undocumented immigrants. Emboldened by Obama's campaign statements, on

10 April 30, 2008, after a series of immigration enforcement raids by the then Bush-led

11 DHS targeting undocumented workers at Los Angeles-area companies, American

12 Apparel spokesman Schey, publicly threatened that the Company would "come down

13 like a ton of bricks [on ICE and use] the courts and other devices if possible" if

14 American Apparel's facilities were raided. Schey also misrepresented that "the

15 company's employees, 4,000 of whom work downtown, were all legal to the best of

16 his knowledgee although he said immigration authorities had asked the company to,

17 provide documentation on its workers." Amazingly, after Schey's tirade, Defendants

18 failed to even disassociate themselves let alone condone his threats on the Company's

19 behalf, which not only misled investors about the blanket legality of all of American

20 Apparel's manufacturing employees, but also immaturely taunted federal regulators

21

22

23

24

25 12 Notably, while defendants did not hire undocumented workers for its retail

26 stores, on July 28, 2009 Business Insider reported that the Company had a policy offiring retail employees that management — including Charney — deemed to be "too

27 ugly.

28

-36


underwaywith their I-9 audit of the Company's Los Angeles1 who were already well

132 factory. May 16, 2008, Charney energize d his3 76, Approximately two weeks later, on

"ro'ect. "Legalize LA" is an American Apparel advertising campaign

4 Legalize LA p ^

uses the light of undocumented workers to promote the Company's brand. Ina5 that p

letter he personally signed for the campaign dated May 16, 2008, Charney, in answer6 P

n "Wh does American Apparel care about immigration reform?"

7 to his own questio Y

8 answered:

g

Simple answer: humanity. Self interested answer: because we do

everything in Los Angeles ... and this city's economy as a whole is

10

deeply dependant on immigrant labor....If these industries were forced

11 p the damage to

12to move offshore... because of stepped-up enforcements,

13the economy would be irreparable. But so many of these businesse

s are,

14understandably, afraid to speak up.

15

thousands of

i77. Defendants were indeed self-interested in employ ingy g

i

16 undocumented workers for the Company' s Los Angeles garment factory . Not onlyy

rs to manufacture its

I 17 was American Apparel "deeply dependant" on these workers

is but in an effort to unfairly highlight the Company's purported pro-18 garments

"-labor/pro-Immigrant over other

competitive advantage s" pro19 labor/pro'slarge

20 clothing retail brands, Defendant s lied to shareholders about the Company re the

21 undocumented workforce. In fact, as Charney himself claimed in

WWD before

ril 11, 2006, "`[flor anyone in the apparel industry not to ge22 Class Period on Ap workers is to not support23 behind some form of legalizati on for these [undocumented]

spiteour face."'24 the people within your own industry....It,s to cut your nose off to

y

25

26 13

atel the Company's threat was an empty one. Neither Schey nor anyone

else Almerican Apparel came down "like a ton of bricks" or otherwise on ICE after

27 the terminations.

28

-37-

Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page IDE

#:1220

1 78. In other words, Defendants knew that, as a vertically-integrated clothing

2 retailer, manufacturer and distributor, the Company could have difficulty filling low -

3 skilled sewing positions with U.S. citizens or other documented workers. In fact, as

4 Chamey himself suggested in the Los Angeles Times on April 20, 2006, "`1 think over

5 50% of the workers in my industry are falsely documented."' Given the foregoing,

6 one would have expected (as investors did) that Defendants had implemented strong

i 7 verification systems to ensure that the Company was diligently complying with U.S.

8 federal immigration laws. As alleged in ¶¶67-69, 71, 73-74, Defendants failed to do

9 so and, instead, knowingly hired undocumented workers.

10 79. By April 2009, it was becoming increasingly clear that the Obama

11 administration would be unable to provide amnesty for undocumented immigrants.

12 So, instead, the Obama Administration sought to enforce existing immigration laws by

13 focusing on employers who knowingly hired undocumented workers — rather than

14 targeting the workers themselves through harsh immigration raids, 'arrests and

15 deportations. On April 30, 2009, Marcy M. Forman, then DHS Director of Office of

{ 16 Investigations for ICE sent an internal memo to the Assistant Director, Deputy

17 Assistant Directors and Special Agents in Charge articulating President Obama's new

18 strategy:

19 An effective strategy must do all of the following: 1) penalize employers

20 who knowingly hire illegal workers; 2) deter employers who are

21 tempted to hire illegal workers; and 3) encourage all employers to take

22 advantage of well-crafted compliance tools.

23 80. Many progressives lauded the shift. Then, only a few months after the

24 Obama Administration announced its policy shift, and a year and a half after the 1-9

25 audit started, on June 30, 2009, the Company filed an 8-K, signed by Charney, which

26 stated:

27 On June 24, 2009, ICE notified the Company that it was unable to verify

28 the employment eligibility of approximately 200 current employees

-38-


1 because of discrepancies in these employees' records. Additionally, ICE

2 notified the Company that another approximately 1,600 current

3 employees appear not to be authorized to work in the United States and

4 appear to have obtained employment by providing, on Form 1-9,

5 documentation which ICE believes, based on its proprietary databases, to

6 be suspect and not valid.

7 81. Then, on July 1, 2009, the Company issued an unusual next-day press

8 release on Form 8-K entitled "American Apparel Announces Developments

9 Regarding Inspection by U.S. Immigration and Customs Enforcement." The press

10 release revealed that many of the targeted undocumented workers had "worked at

11 American Apparel for as long as a decade," confirming that the Company had long

12 failed to comply with immigration laws and that Charney knew many of these

13 employees personally. The release also falsely reiterated that the loss of thesej

14 workers, who Charney knew so well that he referred to them as "family," would not

15 materially impact the Company because "the Company presently believes it would

16 only need to hire for a fraction of those employees that would be terminated. The

17 Company currently has a significant backlog of active job applications." As a result

1 18 of these partial disclosures, half-truths and omissions the Company's stock price fell

19 16% between June 30, 2009 and July 2, 2009 on heavy trading volume.

20 82. Unable to further conceal their U.S. immigration law violations,

21 Defendants changed tactics, falsely representing to investors that the impending loss

22 of thousands of the Company's most important workers would have "no material

23 impact" on the Company's financial results:

24 However, even if the Company were to lose substantially all of the 1,800

25 identified employees (which represent approximately one-third of the

26 5,600 employees the Company currently employs in its manufacturing

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

28 believe that the loss of employees would have a materially adverse

-39-

Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID} #:1222

1 impact on its financial results....The Company believes that its current

2 surplus levels of inventory and manufacturing capacity will mitigate

3 the adverse impact of any disruption to its manufacturing activities that

4 may potentially result from the loss of these employees.

5 83. The same July 1, 2009 Form 8-K, also falsely stated for the first time that

6 it "is the Company's policy, and has been at all times, to fully comply with itsE

7 obligations to establish the employment eligibility of prospective employees under

8 immigration laws."

9 84. The statements above in T¶81-83 were false and misleading because they

10 created a false impression that the Company's growth was being generated from a

11 legitimate business enterprise, when in fact it was the direct result of Defendants'

12 employment of thousands of undocumented workers. These statements also misled

13 the investing public because, at the time they were made Defendants knew, or were

14 deliberately reckless in not knowing, that (i) as more fully described below in ¶¶90,

15 97-98, 101-06, 110, infra and admitted in the Company's 2010 Annual Report, the

16 Company's seemingly positive financial results in each quarter and for the entire fiscal

17 year 2009 were in substantial part based upon an undocumented workforce; (ii) as

18 more fully described below in ¶¶115, 122-40, n.16, infra and admitted in the 2010

19 Annual report, the Company suffered from numerous internal control deficiencies

20 concerning the Company's accounting, its public reporting of financial results, and its

21 disclosures to the SEC; and (iii) as. more fully described below in ¶T126-28, 130,

22 infra, even the Company's own auditor accused the Company of trying to mislead

23 investors.

24 Defendants Concealed That the Manufacturing Employee25 Terminations Had Immediate, Dire Consequences for the Company

2685. During the Class Period, Defendants knew but failed to disclose that

27 losing one-third of the Company's manufacturing employees had an immediate and

28 severely negative impact on the Company's financial performance. In fact, as alleged

-40-


#:1223

1 in ¶72, supra, the Company's November 2007 Proxy earlier acknowledged during

2 better times that such an effect "would be adverse to American Apparel's

3 manufacturing capabilities and harm American Apparel's operations and financial

4 results." Moreover, Defendants were aware, as early as January 2008, that ICE was

5 performing a review of the Company's compliance and that once their violations were

6 inevitably uncovered (as they ultimately were), the Company's business would suffer.

7 Rather than update investors even once between January 2008 and June 30, 2009

8 about the ongoing ICE audit, as they were required to under Item 303 of Regulation S

9 K, Defendants continued to conceal their improper practices until they were, in

10 Charney's words, "forced" to terminate their undocumented manufacturing workers.

11 86. Under Regulation S-K, Item 303, Management's Discussion and Analysis

12 of Financial Condition and Results of Operations, certain prescribed disclosures are

13 required to prevent annual and interim financial statements from being misleading.

14 See Regulation S-K, Item 303(A), Full Fiscal Years, and Item 303(B), Interim

15 Periods. Item 303 states that a filer should "enable the reader to assess material

16 changes in financial condition and results of operations" for the most recent quarter

17 and year-to-date periods of both the current and prior year. Id. As alleged in ¶72,

18 Defendants failed to do so at various times during the Class Period — including waiting

19 four full months to disclose the I-9 notice of audit itself.

20 87. Moreover, as a publicly reporting entity, American Apparel was required

21 under Generally Accepted Accounting Principles ("GAAP") to disclose the likely

22 impacts from significant risks and uncertainties before the actual impact is known.

23 See AICPA Statement of Position No. 94-6 ("SOP 9.4-6"), Disclosure of Certain

24 Significant Risks and Uncertainties. Thus, Item 303 and SOP 94-6 required American

` 25 Apparel to make robust disclosures about potential changes in operating results that

26 might occur, based on currently known trends and other factors, as a result of the 1-9

27 audit and manufacturing terminations. In violation of SEC rules and GAAP,

28 American Apparel failed to do so and therefore misled investors about the true impact

-41-

I -"


1 and consequences of Defendants' immigration violations and their effects on 'the

- 2 Company's financial performance.

3 88. On July 2, 2009, the New York Post reported that the Company's

4 immigration compliance failure was "an embarrassment for the racy retail chain's

5 controversial CEO Dov Charney, who has long portrayed himself as a champion of

6 immigration reform," and that "the retailer's legal team scrambled to explain the

7 colossal mess." The same day, the Los Angeles Times reported that a spokeswoman

8 for ICE commented that, "'[c]learly, if there is widespread use of Social Security

9 numbers that either are not real or belong to someone other than the person named, we

10 have concerns aboutpossibly a scheme to avoid immigration law.—They [American

;11 Apparel] are going to be fined no matter what. What's in question now is the amount

12 of the fine."' Similarly, on July 3, 2009, the New York Times reported that Matt

13 Chandler, a spokesman for the DHS, stated that the ICE action at American Apparel

14 "underscore[s] our commitment to targeting employers that cultivate illegal work

15 forces by knowingly hiring and exploiting illegal workers." Undeterred, however,

16 Defendants continued to falsely downplay the effects of their immigration law

17 violations on the Company's overall financial condition.14

18 89. After the Company's June 30, 2009 and July 1, 2009 manufacturing

19 employee termination disclosures, American Apparel's stock price continued to be

20 artificially inflated, however, because investors tools Defendants at their word that the

21 terminations would have no "materially adverse impact" on the Company.

22 Defendants repeated this deliberately false statement in (i) a press release on Form 8-

23 K dated July 1, 2009; (ii) a conference call on August 13, 2009; (iii) an interview with

24

25 14 On September 30, 2009, conservative Congressman Brian P. Bilbray26 condemned the Company for the ICE fiasco, stating that American Apparel had27 "`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."'

28

-42-

Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page IDr #:1225F

i

j

i1 the Los Angeles Times reported on September 3, 2009; and (iv) on another conference

2 call on November 10, 2009. Based on this misrepresentation, on July 1, 2009,

3 KeyBanc Capital Markets reported that "[m]anagement was clear in emphasizing that

4 even if a significant number of the 1,800 employees are deemed ineligible to work,

5 the Company should not see a material financial impact." Similarly, on July 2, 2009

6 the Los Angeles Times quoted Todd Slater from Lazard Capital Markets who stated

7 that the ICE investigation results "[shhould have no impact on earnings.

8 90. Charney, however, knew all too well from his extensive experience in the

j 9 clothing business (see ¶54, supra) that hiring and training new factory workers was a

10 laborious and time-consuming process. For instance, during a May 13, 2008 investor

E11 conference call, long before they told investors that losing one-third of the Company's

12 garment workers on July 1, 2009 would have no material adverse affect on the

13 Company (see ¶T80-81, 89, supra), Charney explained that "[j]ust once in a while you

14 end up swallowing in a lot of new workers and it does take a bit of a toll on the

15 business." Similarly, during a November 10, 2008 analyst call, Charney candidly

16 admitted that "it takes years training these people.. ..Absorbing all the new workers is

17 an issue." In other words, if Charney knew in May and November 2008 that

18 absorbing new workers tools a toll on the Company when the economy was struggling,J

19 Charney also knew in 2009 that losing one-third of his manufacturing employees

20 would have an adverse material impact on the Company as the economic condition

21 began to improve because that is when those employees were most needed.

22 91. The reason, of course, that hiring new manufacturing workers was 'far

23 more difficult," was due in large measure to the fact that by actually complying with

24 U.S. immigration law, the Company's "Made in the U.S.A." operations were rendered

25 far more challenging. As the Company itself admitted on October 15, 2009,

26 "[c]ompliance with immigration laws has resulted in the dismissal of about 1,500 of

27 our permanent employees due to alleged discrepancies in their immigration

28 documentation." If compliance with immigration laws resulted in the terminations,

-43-


i

1 compliance with those same laws should have never resulted in the hiring of

2 thousands of undocumented workers in the first instance and would have easily

3 enabled Charney to easily replace manufacturing workers. By the fall of 2009,

4 Defendants were still concealing the truth about the true impact of the terminations.

5 92. On August 13, 2009, the Company held an earnings conference call with

6 analysts and investors. During the call, the following exchange took place:

7 [Analyst] : Could you give us a quick update on the status of production,

z

8 particularly given some of the immigration issues that you suffered

9 from? Did you see any disruption?... I guess maybe if you could just

10 give an update on what impact you've seen, I guess quarter to date.

11 [Kowalewski]: When we disclosed the ICE notice on July 1, [2009] we

.12 indicated that at the time, despite the fact that it was difficult to estimate

13 what the impact would be on our results, we didn't believe it would have

14 a material impact, given the fact that we had effectively hired

15 significant amotints of people at the end of Q2 `08.

16 And so, with the decline, also, we were in a situation where we had more

17 labor than was really justified by the amount of business or unit volume

18 that we were seeing. So by — if we were forced to reduce our workforce,

19 the way we would mitigate that would be by increasing the days per

20 week of our employees on the selling floor; so that would virtually pick

21 up all of the reduction in labor that we might see if we had a loss in

22 workers.

23

24 I think at this point, we don't have an update on what the financial

25 impact would be. I think we would basically just reiterate what we said

26 at the beginning of July, which is at this point difficult to estimate, but

27 we do not believe that it's material.

28

-44-


1 93. On the same call, Charney stressed that, even with the loss of workers,

2 American Apparel was positioned to improve margins:

3 [Analyst]: So speaking of the future ... your goal still is kind of that

4 double-digit operating margin?

5 [Charney:] Absolutely.... We are set up to do more business than we're

6 doing. We have the real estate; we have the management team — I mean

7 if — we have enough infrastructure to roll an $800 million business in

8 spite of the fact that we're guiding for a smaller business. So when the —

9 as the economy comes back, as we get better doing what we do, I feel we

10 will get back to those double-digit margins.

11 94. The statements above in %92-93 were false and misleading because they

12 created a false impression that the Company's financial growth was being generated

13 from a legitimate business enterprise when, in fact, it was insubstantial part the direct

14 result of Defendants' intentional scheme to employ undocumented workers in order to

15 meet market expectations and inflate the Company's stock price. These statements

16 misled the investing public because at the time they were made Defendants knew, or

17 were deliberately reckless in not knowing, that as more fully described below and

-1 18 admitted in American Apparel's 2010 Annual Report, the Company's seemingly

j 19 positive financial results in each quarter and for the entire fiscal year 2009 were

20 primarily generated by the Company's long undisclosed and undocumented

21 workforce.

22 95. On September 1, 2009, never one to miss an marketing opportunity,

23 Charney actually sent a "Farewell Letter" to his terminated employees, where, with

24 purported tears flowing, he again sought to blame authorities for a situation of his own

25 making, writing, in pertinent part "[m]any of you have been with me for so many

26 years, and I just cry when I think that so many people will be leaving the

27 company....Although I am crying as I write you this letter, I am confident that

28 immigration reform will be achieved in the near future."

-45-

Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page IDx #:1228

1 96. As the Company's operations quickly continued to unravel as a result of

2 the terminations, Defendants' efforts to downplay the significance of the terminations

3 intensified. For instance, in a September 3, 2009 Los Angeles Times article, Schey

4 falsely represented that "'[w]e do not anticipate [the immigration violations] will have

5 a significant impact on American Apparel's productivity because of the confluence of

6 several factors including the slow economy and high preexisting inventory levels."'

7 Defendants, however, knew that the Company did not have inventory levels sufficient

8 to offset the diminished efficiency resulting from the loss of its only global

9 manufacturing workforce. Indeed, Charney later blamed the Company's financial

10 woes on a lack of inventory.

11 97. For instance, during a May 19, 2010 conference call, clearly frustrated

12 with stock analyst prying, Charney admitted that "[t]here is a hole, in my opinion, of a

13 few hundred thousand pieces not being produced every week. Now we could lose

14 orders at wholesale or they go backorder or they might migrate to the

15 - competition.. ..At the store level people come into the store, if you don't have it in

16 stock, if it's not a store floor, they walk away and they may end up buying somewhere

17 else. They may end up at Zara, who knows." Charney was correct, during this same

18 period, as a result of its inability to efficiently produce inventory as a result of the

19 terminations, the Company was starting to lose business to its competitors. Because

20 the Company's undocumented workforce had been exposed and then terminated, the

21 Company's `. `critical marketing advantage" over its competitors — which was based on

22 Charney's "Made in the U.S.A." concept — was beginning to splinter.

23 98. That the Company's inventory levels were insufficient could not have

24 come as a surprise to Defendants. The Individual Defendants reviewed daily

25 information about inventory levels and inventory needs, and also had enhanced

26 information about the costs of that inventory. For instance, Charney bragged to The

27 Guardian in January 2006 that, "`I have visuality [sic] to what's going on in my stores

28 every night, every day of the week. Right here and now."' In March 2009,

-46-

S}

Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page IDi #:1229

1 Defendants boasted that "we get daily inventories at this point. The whole creative

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

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

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

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

6 knowing what is selling and what's trending." This visibility also allowed

7 Defendants, according to Kowalewski on an August 13, 2009 conference call, to

8 "better... track the cost of inventory..." Defendants were also aware that any

9 decrease in production efficiency would be highly material and strain the Company's

10 vertically-integrated operations — one of the Company's core differentiators before,

11 during and after the Class Period.

12 99. By late September 2009, Defendants' immigration violations were still

13 roiling the markets and Defendants were still busy misleading investors. For instance,

14 a New York Times article dated September 30, 2009, entitled "Immigration

15 Crackdown Leads to 1,800 Pink Slips," reported that "Peter Schey, a lawyer for

16 American Apparel, said that ICE had cited deficiencies in the company's record

17 keeping, but that the authorities had not accused it of knowingly hiring illegal

' 18 workers. A fine threatened by the agency was withdrawn, Mr. Schey said." Schey's

19 September 30, 2009 statement that a fine had been withdrawn was simply not true.

20 The fine had not been withdrawn. Buried deep in the 3Q09 10-Q filed with the SEC,

21 less than two weeks after the September 30, 2009 New Yoriz Times article ran, the

22 Company admitted that, in fact, "[i]n the fourth quarter of 2009, as a result of the

23 inspection, the Company was fined by ICE. ,15 The brief time between Schey's

24 statement and the Company's admission is, at a minimum, very troubling.

25

26

27 15 On April 27, 2011, Schey reportedly told the Daily Journal that he was28 "misquoted" by the New York Times. Public records, however, do not indicate that

-47-

Case 2:10-cv-06352-MMM - JCG Document 66 Filed 04/29/11 of 86 Page ID#:1230

1 100. On November 10, 2009, the Company held a 3Q09 earnings conference

2 call. During the call, Defendants maintained that their immigration violations were

3 not having any adverse impact on the Company. For instance, Kowalewski stated, "I

' 4 think what we said back in July [2009] when we had this issue was we didn't think it

5 was going to have a material impact to our financial results." Kowalewski also

6 compared the Company's labor efficiency to the prior year's, stating, "I think on a

7 year over year basis the efficiency in labor is probably pretty comparable." Charney

8 similarly falsely described the Company's transition to new workers resulting from

9 the loss of one-third of the Company's workforce as "virtually seamless."

10 101. The transition had not been "virtually seamless." Only a few months

11 later, on March 25, 2010, Defendants were forced to admit that the effects of the

12 terminations had been "substantial" and that the "extended disruption on [the

13 Company's] operations has been unprecedented." Further, despite Charney's

14 statements that production efficiency at the Company had been unaffected, Charney

15 later admitted to The Globe and Mail after the Class Period on October 29, 2010 that,

16 "` [the immigration violations] broke our efficiencies and generated a situation where

a 17 we were late delivering garments. It lost us an enormous amount of money.

{ 18 102. By March 2010, Charney had begun to "change[] his tune" about the full

19 effects of the manufacturing terminations. On March 25, 2010, the Company issued a1

20 press release entitled "American Apparel Reports Fourth Quarter and Full Year 2009

21 Financial Results" which alluded to problems with the Company's manufacturing.

22 The press release stated that "[t]he reduction in manufacturing' efficiency was

23 principally a result of the forced termination of over 1,500 experienced manufacturing

24 employees in the third and fourth quarters of 2009 following the completion of the

25

26either he or anyone else at American Apparel ever asked the New York Times for a

27 correction or retraction.

28

-48-


#:1231

1 previously disclosed I-9 inspection by U.S. Immigration and Customs Enforcement."

2 The same day, the Company held a conference call with analysts and investors where

3 Defendants began to disclose albeit (incompletely) some of the adverse impact the

i 4 loss of one-third of the Company's factory workers had been having on the Company.

5 For instance, Charney stated:

6 I think there is the employee productivity, and there is factory

a

7. productivity. The biggest problem has been employee productivity. Two

8 things. One, we have a lot, we lost some of our best people. We're very

9 saddened about that, and we're training a lot of new people who are

10 becoming better and better every week that goes by.

11 103. Over the next two trading days, the Company's stock price fell 22.7%.

12 The disclosure that American Apparel's understaffed factory was its principal problem

13 stood in sharp contrast to Defendants' earlier representations on July 1, 2009 that there

14 would be no need to replace most of the lost workers and the terminations would

15 actually benefit the Company because of overstaffing and that, to the extent that the

16 Company did need to hire new workers, there was "significant backlog" of applicants

1 17 to fill the positions. On April 2, 2010, the Los Angeles Times pointed out the

18 contradiction, reporting that Charney "initially said that business would barely be

a 19 affected. He has since changed his tune, now saying that the personnel cuts were `a

20 big setback' to the company and its plans to make more sophisticated products."

21 104. On March 28, 2010, the New York Post also noted the contradictions in

22 Defendants representations: "[a]t the time [of the ICE announcement], the company

23 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

25 efficiency was principally a result of the forced termination of over 1,500 experienced

26 manufacturing employees in the third and fourth quarters of 2009 following the

27 completion of the previously-disclosed I-9 inspection by [ICE],' Charney's battered

28 company said in a statement." The article further reported that "American Apparel

-49-


1 predicts its comparable-store sales will drop 10 percent in the three months ending

2 April 30. A key problem is the understaffed factory, whose output has become less

3 efficient even as it declines."

4 105. On May 19, 2010, the Company issued a damaging press release entitled

5 "American Apparel Reports Preliminary First Quarter 2010 Financial Results." The

6 Company reported a significant drop in its gross margin due, in part, to "reduced labor

i7 efficiency." The Company also admitted that the "[t]he reduction in labor efficiency

8 was a result of the dismissal of over 1,500 experienced manufacturing employees in

9 the third and fourth quarters of 2009 following the completion of an 1-9 inspection by

i10 U.S. Immigration and Customs Enforcement." The same day, the Company also

11 stated that it "expects that the reduced manufacturing efficiency at the company's

12 production facilities beginning during the fourth quarter of 2009 could likely continue

13 through the end of 2010, and could impact the company's financial results at least

14 through early 2011."

15 106. On a same-day conference call following the Company's May 19, 2010

16 press release, Charney conceded the utter absence of factory employee "stability" that

17 both he and Kowalewski had touted just months earlier (see ¶T19, 21, 100, supra):

18 We didn't move quickly enough after we had the immigration

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

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

21 get back on our game as far as — in a way the fact that we had this Made

22 in USA factory we are not getting the full benefit of it because actually

23 we don't have enough people.

24 107. Upon the release of this news, shares of the Company's stock plunged

25 40.51%, to close on May 19, 2010 at $1.63 per share, on unusually heavy trading

26 volume. Defendants' belated disclosure about American. Apparel's severely and

27 negatively affected margins had starkly contradicted many of Defendants' prior

28 statements that their immigration violations would have no material effect, including

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f


1 that the terminations would "improve[) overhead. " The Company has not held.

2 another conference call with analysts since May 19, 2010.

3 American Apparel's Auditor Resigns and Warns that Defendants'4 Financial Statements "Should No Longer be Relied Upon"

5 108. In the period before American Apparel went public, the Company had

6what the market viewed as "growing pains" with its financial accounting. Upon going

7 public, however, Defendants were obligated to ensure that the Company made full,

8 accurate and timely disclosures of financial results filed with the SEC and otherwise.

9As Kowalewski stated on March 17, 2008, "[u]nlike a company that went public

10 through a standard IPO, which would have a year to get in compliance, because

I11 American Apparel merged with an already public company we had to be in

12compliance from the beginning. We're taking this issue very seriously." To reassure

13 investors that the Company had turned a corner, upon going public, Defendants

14 represented that (i) the Company was working diligently to ensure: , that its controls

15 were in compliance with public reporting requirements; and (ii) : the Company's

16 financial results had been approved by Defendants themselves, the Company's Audit

17 Committee and its independent auditors.

18109. Despite Defendants' Class Period attempts to assure investors that

19 American Apparel was committed to the highest level of financial responsibility, and

20 was conducting itself as befitting a publicly-traded ,company, however, Defendants

21 were nowhere near financial compliance. Instead, Defendants were even purposefully

22 withholding financial information from American Apparel's independent auditor and,

23 as a result, from investors. Indeed, while the reverse merger with Endeavor enabled

24 Charney to tap the public markets and enrich himself faster than two wags of a goat's

25 tail, the reverse merger, unlike an IPO, required the Company to be, SOX-compliant

26 from its first day as a publicly-traded company. See ¶108, supra. Asset forth below,

27 Defendants knew from the first day of the Class Period that the Company was

28 anything but SOX-compliant.

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t


1 110. On March 17, 2008, a few months after American Apparel went public,

2 Kowalewski assured investors that "[a] big focus for us in 2008 as apublic company

3 is going to be remediating these material weaknesses so we can get into compliance

4 with Sarbanes-Oxley." This statement, which came three days before Charney called

5 the Company's previous CFO a "complete loser," (¶25, supra) was deliberately

1 6 misleading because Defendants knew that the Company could not possibly be on track

7 to remedy its control problems by the end of 2008 and, in fact, to this day, American

8 Apparel's deficiencies still have not been remedied. For instance, American

j 9 Apparel's 2010 Annual Report, filed with the SEC on March 31, 2011, admitted the

10 falsity of these statements by including an "adverse opinion on the effectiveness of

11 the Company's internal control over financial reporting [during the Class Period]

12 because of the existence of material weaknesses [at the Company]." The adverse

13 opinion concluded that, during the Class Period: (i) "the company did not maintain an

14 adequate control environment that fully emphasized the establishment of, adherence

15 to, or adequate communication regarding appropriate internal control over financial

16 reporting;" and (ii) "[t]he Company did not perform adequate independent reviews

17 and maintain effective controls over the preparation of financial statements."

18 111. Nevertheless, during the Company's May 13, 2008 1 Q08 conference call,

19 Charney stated that American Apparel "want[s] to pursue a strict corporate orthodoxy

20 as far as financial accounting issues." Charney further explained that the Company

21 had "engaged and continue[s] to work with Moss Adams on moving us towards being

22 SOX compliant. I know it's very important for our investors and also an important

23 issue for us. Stay tuned. We're going to be making a lot of progress as far as building

24 a world class financial team at American Apparel." Similarly, during the Company's

25 August 14, 2008 conference call, Charney assured investors that the Company's

26 financial accounting was moving ahead as scheduled, stating that "[o]verall our SOX

27 implementation is on track with us having just completed the assessment phase. We

28 are expected to demonstrate significant progress in our [remediation] iof [deficiencies]

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1 by year-end [2008]. Since we have assessed and reported on the effectiveness of

2 internal controls, we are in compliance with SOX for our full requirements."

3 112. The statements above in ¶¶110-1 I were false and misleading because as

4 more fully described below and admitted in the 2010 Annual Report, the Company

5 suffered from numerous internal control deficiencies concerning the Company's

6 accounting, its public reporting of financial results, including misleading its own

7 auditor.

8 113. Throughout 2008 and 2009, analysts relayed to the market Defendants'

9 false messages about the Company's internal controls. For example, the Company's

' 10 August 2008 2Q08 earnings announcement that "2008 continues to be a year of

! 11 significant growth for American Apparel. We are pleased with our financial

12 performance for the second quarter, and believe we are only still laying the

13 groundwork for a very successful future," drove American Apparel's stock price up

14 over 25% to $8.20 per share on August 15, 2008, on extraordinarily high volume of

15 nearly 1.5 million shares traded. Similarly, on August 19, 2008, in response to the

16 Company's 2Q08 earnings results, Ladenburg analyst Mickey M. S.chleien increased

17 its price target for the Company from $8.00 to $10.50. During the Company's

18 November 10, 2008 earnings conference call for 3Q08, Kowalewski again told

19 investors that the Company's internal controls progress was still on track, stating,

20 "[o]n the Sarbanes-Oxley front, we continue to be on track and continue to expect to

21 demonstrate significant progress intermediating deficiencies by yearend." 16 In

22 response to the Company's 3Q08 results, Lazard Capital Markets analyst Todd Slater

23 lauded Defendants, saying "congratulations. One of the few bright real spots in this

24

25 16 On January 5, 2009, it was reported that then-CFO Kowalewski sent an26 American Apparel executive an e-mail that the Company "almost went bankrupt last

Friday." Defendants' lack of controls clearly extended beyond their dismal financial27 reporting.

28

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1 environment." On March 17, 2009, Mr. Slater again congratulated Defendants for the

2 Company's 4Q08 and overall 2008 results, stating, "let me congratulate you for hitting

3 numbers that you have guided to over a year ago when the world was a very, very

4 different place ... you may be the only retailer guiding to an increase in revenue in `09

5 as well as an expansion in operating margins and an increase in earnings. You are in

6 a pretty elitegroup there." Defendants knew, however, that they were only "bucking

7 the trend" (as analyst Telsey Advisory Group put it in a November 7, 2008 reporti

8 about the retail sector) by, as alleged, misleading the market about the impact the

i 9 terminations were having on the Company's financial performance.

10 114. During the Company's March 17, 2009 4Q08 and fiscal year 2008

11 earnings conference call, Charney again assured investors that for 2008, "we were

12 able to build out our finance and accounting team and improved our controls and

13 systems" and, as an example, misleadingly touted the. Company's promotion of

14 Kowalewski to CFO, telling investors that Kowalewski's "knowledge of the workings

1 15 of our unique Company, his work ethic and work in building our team and our internal

16 financial capabilities over the past year made him the absolute best choice for that

17 position."

18 115. Kowalewski, then 31-years old and a former Company intern, was, ina1 19 fact, the worst possible choice for CFO. Kowalewski had zero prior experience as the

20 CFO of a publicly-traded (or any other) company and had little to no independence

21 from his friend and mentor, Charney. By anointing Kowalewski as CFO, Charney

22 broke his earlier promise to investors that he was "building a world class financial

23 team at American Apparel." Kowalewski was thankfully replaced with Mr. Luttrell in

24 February 2011.

25 116. Then, in a press release on Form 8-K dated March 16, 2009, American

26 Apparel actually announced some good (however short-lived) news. The Company

27 entered into a private financing agreement with Lion Capital for over $80 million in

28 secured second lien notes at a 15% interest rate maturing December 31, 2013 with

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1 detachable warrants. An April 22, 2009 KeyBanc Capital Markets report noted that

2 the partnership with Lion Capital "injected a much needed level of financial

3 discipline" and "provides capital structure [and] increased financial acumen." As a

4 result, the report concluded that the Lion Capital deal "may help boost investor

5 confidence about corporate governance at the company."

6 117. The Lion Financing Agreements gave Lion Capital the right to designate

7 two persons to American Apparel's Board, in addition to something called a "Board

i 8 Observer." On May 12, 2010, Capps, a Lion Capital Partner and American Apparel

9 Board member resigned from the Board, while remaining as the `Board Observer."

10 Lion Capital appointed Lea to the Board to replace Capps. On March 30, 2011 Capps

11 resigned as a "Board Observer" and Lea and Richardson resigned from the Board

12 citing "conflicts of interest."

13 118. With Lion Capital's significant financial interest in the Company and its

14 own Partners serving on the Company's Board, Lion Capital had the power to control

15 the Company's management and policies at two critical junctures during the Class

16 Period. Indeed, Lion Capital's first $80 million lifeline to American Apparel was key

17 to the Company's very survival because, at the time, the Company was close to

18 defaulting with MSD Capital, L.P. ("MSD"). MSD is an investment firm that was

19 established in 1998 exclusively to manage the capital of Michael Dell and his family.

20 American Apparel owed Special Opportunity Funds Investments, an arm of MSD, $51

21 million.

22 119. In a March 13, 2009 press release announcing Lion Capital's investment,

23 Charney trumpeted that "` [t]his investment provides us with a long term solution for

24 our capital structure and an enhanced ability to grow our brand both domestically and

25 internationally over the coming years. "' In response to this announcement, American

26 Apparel's stock price jumped 67.79% on March 13, 2009 to close at $2.50 per share,

27 on high volume of over 1.9 million shares. A March 13, 2009 Dow Jones Factiva

28 article reported that "Analyst Todd Slater of Lazard Capital said he estimates the new

-55-


1 capital — which has alleviated recent liquidity concerns — can fund the company for the

2 next five years." In truth, the Company's financial condition was so dire, that even

3 Lion Capital's $80 million cash infusion could not provide a "long term solution" for

4 the Company's meager balance sheet. Only a short time after Lion Capital loaned the

5 Company $80 million, on October 1, 2010, American Apparel had to go back to Lion

6 Capital to restructure its credit agreement or face possible bankruptcy.17

7 120. On April 22, 2009, KeyBanc Capital Markets analyst Edward Yruma met

8 with Charney and Lion Capital's Richardson to discuss Lion Capital's new

9 relationship with American Apparel and Dov Charney. After the meeting, Mr. Yruma

10 wrote that "[t]he question was asked about what management views as a Street

11 misperception about the Company, to which management highlighted the flawed view

12 that the Company is disorganized and unsystematic internally. Charney emphasized

13 the Company's commitment to conservatism and maintaining best practices." In

14 response, American Apparel's stock price increased 7.66% to $4.64 per share on April

15 22, 2009.

16 121. During a May 18, 2009 analyst call, "[t]he Company also announced in

17 April [2009] the appointment of a new independent auditor [Deloitte], and also

- 18 completed a full quality of earnings review with Lion Capital's , accountants at

19 KPMG." The May 18, 2009 press release also mentioned, seemingly in passing, that

20 the Company might have to restate its fiscal year 2008 financial statements — the

21.

2217 On April 21, 2011, American Apparel again barely staved off bankruptcy when

23 a group of Canadian investors agreed to provide the Company with up to $45 million.24 The investors also are getting warrants to buy an additional $30 million worth of25 shares over the next six months, also at 90 cents a share. Charney agreed to contribute

$700,000 of his own money to the Company. However, unlike other existing26 investors, whose ownership stakes will be diluted by the issuance of shares to the new27 investors, Charney's prior ownership stake can be restored if the Company's stock

price rises.28

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Case 2:1 0-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1239

1 financial statements that its auditor had audited just two months earlier. A

2 restatement, however, was necessary. During its review, Deloitte learned that on

3 March 16, 2009 —the same day that American Apparel filed its 2008 Annual Report-

4 American Apparel had notified investors in a separate filing that on March 13, 2009, it

5 had refinanced its so-called "long-term" debt with the new $80 million credit facility

6 from Lion Capital. Although the need for restatement was obvious, it took American

7 Apparel another two months, until July 23, 2009, to confirm this fact to investors.

8 Notwithstanding the two-month delay, in violation of SEC reporting requirements,

i 9 American Apparel's admission that it had to restate fiscal year 2008 was filed three

10 days late.

11 122. By early 2010, primarily as a result of the Company's immigration law

12 violations and the significant adverse impact those violations had on its financial

13 performance, brand, liquidity and overall business condition as alleged in ¶¶69-107,

14 supra, American Apparel was in desperate need of additional financing and covenant

15 waivers. Defendants knew that such financing and waivers would be much more

16 difficult (and prohibitively expensive) to obtain if the Company issued "going

17 concern" qualifications and disclosed the serious deterioration in its financial

18 condition. Indeed, under then-existing covenants, some of the Company's debt

19 immediately came due upon the issuance of such a qualification. To cover up its

20 precarious financial condition, Defendants deliberately withheld crucial adverse

21 financial information and negative trends from both Deloitte and investors, thus

22 enabling Defendants to issue financial statements and other positive qualitative

23 statements during conference calls without alerting investors to the severity of the risk

24 that American Apparel would go bankrupt which Defendants were aware of at least as

25 early as early December 2008, as alleged in ¶29, supra.

26 123. On May 19, 2010, the Company issued an earnings press release which

27 included a blunt warning that it was likely to be in default on June 30, 2010 and that

28 this "would have a material adverse impact on the Company's operations which would

-57-


1 result in the need for the Company to modify its current business plan and/or curtail

2 its operations and could affect the Company's ability to continue operations as a

3 going concern." Deloitte, however, had just signed an audit opinion on March 31,

4 2010, less than two months prior to the Company's default which failed to include anyi

5 "going concern" language. An auditor is responsible for including such language in

6 their audit report if they believe it is "reasonably possible" that the auditee will go

7 bankrupt within 12 months of the audit financial statement date. See PCAOB

r 8 §341.02-03, The Auditors Consideration ofAn Entity's Ability to Continue as a Going

9 Concern.

10 124. Facts later revealed by Deloitte in conjunction with its abrupt resignation,

11 confirm that Defendants knowingly concealed material adverse financial information

i 12 not only from Deloitte but from American Apparel investors as well. In connection

13 with Deloitte's resignation disclosures and the withdrawal of its March 2010 audit,

14 American Apparel revealed the following:

15 "Deloitte explained that its conclusion was based on the significance of

16 the declines in operations and gross margin in the Company's

17 February 2010 monthly financial statement, combined with the

18 January 2010 monthly financial statements, the Company's issuance of

19 revised projections in early May 2010 which reflected a significant

20 decrease in the Company's 2010 projections, and Deloitte's

21 disagreement with the Company's conclusion that the results shown in

22 the February 2010 monthly financial statements would not have required

23 a revision to the Company's projections as of the date of the 10-K filing

24 and the issuance of Deloitte's reports. Deloitte further indicated that

25 their decision considered their inability to perform additional audit

26 procedures, their resignation as registered public accountants and their

27 professional judgment that they are no longer willing to rely on

28 management's representations due to Deloitte's belief that

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fCase 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID

#:1241

1 management withheld from Deloitte the February 2010 monthly

2 financial statements until after the filing of the 2009 10-K and made

3 related misrepresentations.

4 125. These disclosures confirm that Defendants deliberately concealed

5 significant and material adverse information from investors regarding the Company's

6 rapidly deteriorating financial position and its risk of default — at a time when the

7 Company was issuing purportedly clean financial results and rosy statements about its

8 financial condition. Indeed, during the Company's March 25, 2010 conference call

9 with investors discussing 1 Q 10 results, Charney ended the call by representing that "I

10 think the outlook for American Apparel is strong, and I am very confident about the

11 business, and I am happy to be here, and I wish everybody the best and I am looking

12 forward to a great year." However, as revealed in ¶ 124, supra, a month before those

13 statements were made, Defendants already had actual knowledge of the

14 "significan[t] .... declines" in the Company's "February 2010 monthly financial

15 statement" and the results of its "January 2010 monthly financial statements." Yet,

16 Defendants deliberately concealed this material adverse information from investors,

17 made "related misrepresentations" to Deloitte and the public and continued to

18 misrepresent the Company's financial condition and the increasing risk of default.

19 126. Then, on July 28, 2010, the Company revealed that, effective July 22,

20 2010, Deloitte had resigned as the Company's independent public accountant. The

21 Form 8-K further revealed that "Deloitte advised the Company that certain

22 information has come to Deloitte's attention, that if further investigated may

23 materially impact the reliability of either its previously issued audit report or the

24 underlying consolidated financial statements for the year ended December 31, 2009

25

26

27

28

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3


1 included in the Company's 2009 Form 10-K. " 18 In response to this news, American

2 Apparel's stock declined 14.36%, to $1.55, on heavy trading.

3 127. Deloitte resigned because, in its words, it was "no longer willing to rely

4 on management's representations due to Deloitte's belief that management withheld

5 from Deloitte the February 2010 monthly financial statements until after the filing of

6 the 2009 Annual Report and made related misrepresentations." Analyst reaction was

7 swift and severe. For example, a KeyBanc Capital Markets report dated July 29, 2010

8 stated that:

9 After the close American Apparel [] filed an 8-K stating that its auditor

10 Deloitte & Touche, LLP resigned effective July 22, 2010 — we move to

11 NOT RATED from a BUY rating. The filing was unexpected, and

12 while it does not necessarily imply any degree of misstatement, it

13 certainly raises an already high risk profile.—The Company replaced

14 Marcum on April 3, 2009 with Deloitte & Touche — we believe in an

15 effort to provide comfort to investors. However, the transition has not

16 gone smoothly and the Company has missed almost every single

i

17 subsequent SEC filing deadline. This has been in part due to the

18 previous debt covenant issues, but we believe is also in part due to issues

19 between APP and Deloitte... given the high degree of uncertainty we

20 are unable to provide an investment opinion and step to the sidelines.

21

22

23 18 Because American Apparel has made subsequent disclosures concerning24 Deloitte that are inconsistent and factually incorrect, and Deloitte was not permitted to

_ comment beyond a boilerplate letter saying they "disagree[d]" with the Company,25 some details behind Deloitte's resignation remain unclear. See AICPA ET §301.01,

Confidential Client Information; PCAOB AU §315, Communications Between26 Predecessor and Successor Auditor. The Company's Audit Committee has

purportedly been investigating this matter since last year. It has yet to publicize the27 results.

28

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1 128. On July 30, 2010 the New York Post observed that "Dov Charney

2 continues to rip his company's stock price to shreds" and had "skimped on details in a

3 securities filing," Deloitte had said that the Company's "financial statements for

4 2009 may not be reliable" and that it had uncovered information "`that if further

5 investigated may materially impact"' a previous audit report as well as the retailer's

6 2009 financial statements. That same day, WWD reported that "[m]any of American

7 Apparel Inc.'s investors took the lead of Deloitte & Touche, the company's

I 8 accountant, and split Thursday."

! 9 129. Then, on August 17, 2010, the last day of the Class Period, the Companyi

10 shocked investors with a press release entitled "American Apparel Reports

11 Preliminary Second Quarter 2010 Financial Results." The press release revealed, in

12 relevant part:

13 Gross margin for the second quarter of 2010 is expected to be in the

14 range of 50% to 52%, as compared to 59.0% for the prior year second

15 quarter. Gross margin was negatively impacted by a shift immix from

16 retail to wholesale net sales, which generate lower margins, and by lower

{ 17 labor efficiency at the Company's production facilities in the second

18 quarter of 2010 compared to the prior year period. The lower labor

19 efficiency was primarily a result of the hiring of over 1,600 net new

20 manufacturing workers during the second quarter of 2010, as well as the

21 impact of an increase in the mix of more complex retail styles produced.

22 Loss from operations for the second quarter of 2010 is expected to be in

23 the range of $5 million to $7 million, as compared to income from

24 operations of $7.3 million in the second quarter of 2009.

25

26 The Company expects to report a substantial loss from operations and

27 negative cash flows from operating activities for the six months ended

28 June 30, 2010. Based on this, and trends occurring in the Company's

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` Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1244

1 business after the second quarter and projected for the remainder of

2 2010, the Company may not have sufficient liquidity necessary to sustain

3 operations for the next twelve months. The Company's current

4 operating plan indicates that losses from operations are expected toi

5 continue through at least the third quarter of 2010. These factors,

6 among others, raise substantial doubt that the Company will be able to

7 continue as a going concern.

8 130. The same day, the Company was also forced to disclose that Defendants

9 had received a grand jury subpoena, dated July 30, 2010, from the U.S. Attorney's

10 Office for the S6uthern District of New York for the production of documents relating

11 to the circumstances surrounding the Deloitte resignation and a related inquiry from

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

13 American Apparel had also received a subpoena from the U.S. Attorney's Office for

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

15 investigation being conducted by the FBI into Deloitte's resignation and the

16 Company's financial reporting and internal controls, and a subpoena from the SEC for

17 documents relating to its, now, formal investigation surrounding Deloitte's

18 resignation and the Company's financial reporting and internal controls. Thea

19 investigations are ongoing.

20 131. Over the next two days, as the full truth about Defendants'

21 misrepresentations were finally digested by the market, American Apparel's stock

22 price declined rapidly, from $1.39 per share to just $0.75 per share on August 19,

23 2010 — a decline of over 46% on extremely heavy trading.

24 Post Class Period Admissions

25 132. After the Class Period, Defendants made a series of admissions that

26 confirmed their misleading statements to investors during the Class Period. On

27 August 18, 2010, WWD reported after an interview with Charney that "Charney traced

28 most of the current[financial] problems back to difficulties at the arm's Los Angelesj A .f

-62-


1 factory, which hired 1,600 new workers in the second quarter. Last year, American

2 Apparel dismissed workers who could not prove to federal authorities that they had

3 the legal right to work in the U.S. `Replacing the workers that we lost in [our] L.A.

4 factory was far more difficult than I anticipated,' he said. Ìn addition, because the

5 consumer is battered, having the right product at the right time at the right place is

6 more important than ever. But we could not respond quickly enough because of our

i 7 issues with the factory."' The article further reported that, "[t]he raffish

8 Charney... appeared to run American Apparel as a perennial start-up. Along with that

9 came a lack of operation discipline that has hurt the company. Craig Johnson,

10 president of Customer Growth Partners, said the company has been `rapidly going

11 downhill' with operational problems, issues with management integrity and corporate

12 governance. Àny one of these issues is a challenge,' Johnson said. `The combination

13 of two or more can be fatal. Lenders ready to pull the plug is not a cause of the

14 problem, but a result."' The next day, on August 19, WWD quoted an experienced

15 corporate lawyer as stating that "Ànytime auditors step back, you've really got to

16 take a hard look at whether there was fraud."'

{ 17 133. Then, on February 7, 2011, American Apparel filed an unusual

18 amendment to its 2009 Annual Report with the SEC. It was the Company's fourth

19 such amendment to its 2009 Annual Report. The amended 2009 Annual Report was

20 filed to provide investors with "unaudited" financial statements for the year ended

21 December 31, 2009 that were previously filed as "audited." By this time, things had

22 become so grave for Defendants, that, in an Èxplanatory Note" for the unaudited

23 2009 Annual Report, Defendants included a meaningless (yet self-serving) disclaimer

24 that the mere filing of the amended 2009 Annual Report was itself "not an admission

25

26

27

28

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1 [that prior filings] included any untrue statement of a material fact or omitted to state a

2 material fact necessary to make the statements therein not misleading. "19

3 134. Finally, on March 31, 2011 American Apparel finally filed its long -

4 awaited and delayed 2010 Annual Report with the SEC. The 2010 Annual Report

5 finally provided more (belated) granularity to the Deloitte fiasco, stating, for the first

6 time, that Deloitte's accusations of fraud against the Company was:

7 based on the significance of the declines in operations and gross

8 margin in the Company's February 2010 monthly financial statement,

9 combined with the January 2010 monthly financial statements, the

10 Company's issuance of revised projections in early May 2010 which

11 reflected a significant decrease in the Company's 2010 projections, and

12 [Deloitte]'s disagreement with the Company's conclusion that the results

13 shown in the February 2010 monthly financial statements would not

14 have required a revision to the Company's projections as of the date of

15 the 10-K filing and the issuance of [Deloitte]'s reports. [Deloitte] further

16 indicated that their decision considered their inability to perform

17 additional audit procedures, their resignation as registered public

18 accountants and their professional judgment that they are no longer

19 willing to rely on management's representations due to [Deloitte]'s

20 belief that management withheld from [Deloitte] the February 2010

21 monthly financial statements until after the filing of the 2009 10 -K and

22 made related misrepresentations.

23

24

25

26 19 Of course, this paragraph was included many months after the first putativesecurities class action complaint against the Company was filed in this District on

27 August 25, 2010.

28

-64-


1 The Audit Committee and the Company's management are currently

2 evaluating these matters. The Audit Committee of the Company has

3 commenced an investigation into the assertions that management

4 withheld the February 2010 monthly financial statements and related

5 misrepresentations.

6 135. Notably, the Company's Audit Committee and management have been

7 "currently evaluating these matters" since last summer. No one besides Charney is

8 optimistic about their findings.

a 9 AMERICAN APPAREL'S MATERIAL WEAKNESSES IN INTERNAL10 CONTROLS CAUSED IT TO VIOLATE THE BOOKS AND RECORD ACT

11 136. Section 13(b)(2) of the Exchange Act states, in pertinent part, that every

12 reporting company must: (a) "make and keep books, records, and accounts, which, in

13 reasonable detail, accurately and fairly reflect the transactions and dispositions of the

14 assets of the issuer;" and (b) "devise and maintain a system of internal accounting

15 controls sufficient to provide reasonable assurances that... transactions are recorded as

16 necessary [] to permit the preparation of financial statements in conformity with

17 [GAAP]." 15 U.S.C. §78m. These provisions require an issuer to employ and

18 supervise reliable personnel, to maintain reasonable assurances that transactions are

19 executed as authorized, to properly record transactions on an issuer's books and, at

20 reasonable intervals, to compare accounting records with physical assets.

21137. Defendants caused American Apparel to violate §13(b)(2)(A) of the

22 Exchange Act because Defendants knew or were reckless in not knowing that

23 American Apparel's inaccurate and false records were not isolated or unique instances

24 because they were improperly maintained for multiple reporting periods, from at least

25 fiscal year 2008 through the end of the Class Period. Accordingly, American Apparel

26 violated §13(b)(2)(A) of the Exchange Act.

27. 138. In addition, American Apparel violated §13(b)(2)(B) of the Exchange

28 Act by failing to implement procedures necessary to properly value inventory.

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F

Case 2:1 0-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page IDs #:1248P

f

1 Despite knowing the true dismal state of the Company's lack of adequate controls and

2 undocumented workforce, Defendants regularly issued quarterly and annual financial

3 statements throughout the Class Period without correcting the deficiencies in

4 American Apparel's internal accounting controls and falsely asserted that its financial

5 statements complied with GAAP. Financial reporting includes not only financial

6 statements, but also other means of communicating information that relates directly or

7 indirectly to the information in the financial statements. See Financial Accounting

8 Standards Board ("FASB") Statement of Financial Accounting Concepts No. 1, ¶7.

: 9 For this reason, in addition to American Apparel's failure to make the required

10 disclosures in its financial statements and in its SEC filings, American Apparel also

11 shirked its duty to make such disclosures in its conference calls, its press releases and

12 its annual reports.

13 139. Due to its accounting improprieties, the Company presented its financial

14 results and statements in a manner that violated GAAP, including the following

15 fundamental accounting principles:

16 • The principle that interim financial reporting should be based

17 upon the same accounting principles and practices used to prepare

18 annual financial statements (APB No. 28, ¶10);

19 • The principle that financial reporting should provide information

20 that is useful to present and potential investors and creditors and

21 other users in making rational investment, credit and similar

22 decisions (FASB Statement of Financial Accounting Concepts

23 No. 1, ¶34);


25 about the economic resources of an enterprise, the claims to those

26 resources, and the effects of transactions, events and

27 circumstances that change resources and claims to those resources

28 (FASB Statement of Financial Accounting Concepts No. 1, ¶40);

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z


I


2 about how management of an enterprise has discharged its

3 stewardship responsibility to owners (stockholders) for the use of

4 enterprise resources entrusted to it. And to the extent that

5 management offers securities of the enterprise to the public, it

6 voluntarily accepts wider responsibilities for accountability to

7 prospective investors and to the public in general (FASB

8 Statement of Financial Accounting Concepts No. 1, ¶5.0);{


10 about an enterprise's financial performance during a period.

11 Investors and creditors often use information about the past to

12 help in assessing the prospects of an enterprise. Thus, although

13 investment and credit decisions reflect investors' expectations

14 about future enterprise performance, those expectations are

15 commonly based, at least partly, on evaluations of past enterprise

16 performance (FASB Statement of Financial Accounting Concepts

j 17 No. 1, ¶42);

18 • The principle that financial reporting should be reliable in that it

19 represents what it purports to represent. That information should

20 be reliable as well as relevant is a notion that is central to

21 accounting (FASB Statement of Financial Accounting Concepts

22 No. 2, ¶¶58-59);

23 • The principle of completeness, which means that nothing is left

24 out of the information that may be necessary to insure that it

25 validly represents underlying events and conditions (FASB

26 Statement of Financial Accounting Concepts No. 2, ¶79); and

27 The principle that conservatism be used as a prudent reaction to

28 uncertainty to try to ensure that uncertainties and risks inherent in

-67-

I


1 business situations are adequately considered. The best way to

2 avoid injury to investors is to try to ensure that what is reported

3 represents what it purports to represent (FASB Statement of

4 Financial Accounting Concepts No. 2, ¶¶95, 97).i

5 140. Moreover, Defendants' undisclosed, adverse, material information duringi 6 the Class Period is the type of information that, because of SEC regulations, national

7 stock-exchange regulations, and customary business practice, investors and securities

8 analysts expect to be disclosed and by corporate officials and their legal and financial

9 advisors know to be the type of information that must be disclosed.

10 LOSS CAUSATION

11 141. The market for American Apparel's publicly traded securities was open,

12 well-developed and efficient at all relevant times. As a result of Defendants'

13 materially false and misleading statements and failure to disclose material facts as

14 allege above, American Apparel's publicly-traded securities traded at artificially

15 inflated prices during the Class Period. Lead Plaintiff and other members of the Class

i 16 purchased or otherwise acquired American Apparel securities relying upon the

1 7 integrity of the market price of American Apparel's securities and market information

18 relating to American Apparel, and have been damaged thereby.

19 142. Throughout the Class Period, Defendants engaged in a fraudulent course

20 of conduct that artificially inflated American Apparel's stock price and operated as a

21 fraud or deceit on Class Period purchasers of American Apparel securities.

22 Defendants achieved this fagade of success, growth, responsibility and strong future

23 business prospects by misrepresenting the Company's compliance with immigration

24 laws, financial responsibility, effect of immigration sanctions, ability to continue as a

25 going concern and true financial condition. Defendants' false and misleading

26 statements and material omissions had their intended effect, causing American

27

28

-68-


1 Apparel's stock to trade at artificially inflated prices throughout the Class Period,

2 reaching as high as $15.60 per share on December 12, 2007.

3 143. The economic loss, i.e., damages, suffered by Lead Plaintiff and other

4 members of the Class was a direct result of Defendants' scheme to conceal their

5 immigration law violations and their effects to artificially inflate the Company's stock

6 price and the subsequent significant decline in the value of American Apparel's stock

7 price as the relevant truth was revealed in a series of partial adverse disclosures.

8 When Defendants' prior misrepresentations were disclosed and became apparent to

9 the market, American Apparel's stock price fell as the prior inflation came out of

10 American Apparel's stock price. By the time the market had fully digested these

11 disclosures, American Apparel's common stock closed at $0.75 per share on August

12 19, 2010.

13 144. Defendants' false and misleading representations and omissions about the

14 Company's compliance with immigration laws, financial controls, effect of

15 immigration sanctions, ability to continue as a going concern and true financial

16 condition caused and maintained the artificial inflation in American Apparel's stock

17 price throughout the Class Period until the facts about the Company's true financial

18 condition were revealed to the market. These revelations did not happen all at once,

19 but rather were the result of investigation by investors, analysts, ratings agencies and

20 journalists. The timing and magnitude of American Apparel's securities price

21 declines, as detailed herein, negate any inference that the loss suffered by Lead

22 Plaintiff and the Class was caused by changed market conditions or other

23 macroeconomic factors unrelated to Defendants' fraudulent conduct.

24 145. On June 30, 2009, the Company filed a Form 8-K with the SEC, authored

25 by Charney. The Form 8-K disclosed that the Company had been notified by ICE that

26 "it was unable to verify the employment eligibility of approximately 200 current

27 employees because of discrepancies in these employees' records. Additionally, ICE

28 notified the Company that another approximately 1,600 current employees appear not

-69-


1 to be authorized to work in the United States and appear to have obtained employment

2 by providing, on Form I-9, documentation which. ICE believes, based on its

3 proprietary databases, to be suspect and not valid." On July 1, 2009, the Company

4 issued a press release entitled, "American Apparel Announces Developments

j 5 Regarding Inspection by U.S. Immigration and Customs Enforcement." The press

6 release falsely reiterated that "even if the Company were to lose substantially all of the

i 7 employees identified by ICE (which represent approximately one-third of the 5,600

8 employees the Company employs in its manufacturing operations in the Los Angeles

9 area), the Company does not currently believe that the loss of these employees would

10 have a materially adverse impact on its financial results."

11 146. In response to this news which contradicted Defendants' prior

i 12 representations about the Company's immigration compliance, from June 30 to July 2,

13 2009, the Company's stock price fell approximately 16%.

14 147. Then, on March 25, 2010, the Company issued a press release entitled

15 "American Apparel Reports Fourth Quarter and Full Year 2009 Financial Results." In

16 the press release, the Company reported:

1

17 Gross margin for the fourth quarter of 2009 was 55.0% as compared to

18 54.5% for the prior year fourth quarter. Gross margin was favorably

a

19 impacted by the depreciation of the U.S. dollar against foreign currencies

20 in the fourth quarter of 2009 compared to the fourth quarter of 2008, and

21 by a continuing shift in mix from wholesale to retail sales, which

22 generate higher gross margins. These factors were largely offset by a

23 substantial reduction in manufacturing efficiency at the company's

24 production facilities in the fourth quarter of 2009 compared to the prior

25 year period. The reduction in manufacturing efficiency was principally a

26 result of the forced termination of over 1,500 experienced manufacturing

27 employees in the third and fourth quarters of 2009 following the

28

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` Case 2:10-cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1253

i

1 completion of the previously disclosed I-9 inspection by U.S.

2 Immigration and Customs Enforcement.

3

4 Additionally, gross margin was also negatively impacted by lower

5 capacity utilization of the company's manufacturing facilities in the first

6 half of 2009, and the substantial reduction in manufacturing efficiency

7 experienced in the fourth quarter of 2009 at the company's production

8 facilities.

9 148. The March 25, 2010 press release also stated that because of its practice

10 of hiring workers who were ineligible for employment in the U.S., the Company was

11 unable to provide annual financial guidance:

12 Based on the substantial impact of the reduced manufacturing efficiency

13 experienced at the company's production facilities beginning in the

14 fourth quarter of 2009, and the high level of uncertainty surrounding the

15 duration of the reduction in efficiency, as well as due to uncertainty

16 stemming from the company's constrained ability to undertake additional

17 investments in its business as a result of certain restrictive financial

18 covenants under the company's credit facilities, the company has

19 determined to defer providing annual financial guidance for 2010 until it

20 reports its first quarter 2010 financial results in early May.

21 149. In response, the next day the Company's stock price dropped 17.45% to

22 $3.17, on heavy trading of 1.85 million shares. The following trading day, the

23 Company's stock price dropped an additional 6.31% to $2.97.

24 150. On May 19, 2010, the Company issued a press release entitled "American

25 Apparel Reports Preliminary First Quarter 2010 Financial Results." In the press

26 release, the Company disclosed the continuing fallout from its immigration violations:

27 Gross margin for the first quarter of 2010 was 50.4% as compared to

28 57.2% for the prior year first quarter. Gross margin was negatively

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Case 2:1 0-cv-06352-M MM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1254

4

1 impacted by a shift in mix from retail to wholesale net sales, which

2 generate lower margins, and by reduced labor efficiency at the

3 company's production facilities in the first quarter of 2010 compared to

4 the prior year period. The reduction in labor efficiency was a result of thei

5 dismissal of over 1,500 experienced manufacturing employees in the

! 6 third and fourth quarters of 2009 following the completion of an I-9

7 inspection by U.S. Immigration and Customs Enforcement.

8

9 The company currently expects that the reduced manufacturing

10 efficiency at the company's production facilities beginning during the

11 fourth quarter of 2009 could likely continue through the end of 2010, and

12 could impact the company's financial results at least through early 2011.

13 The company experienced an improvement in production efficiency in

14 the first quarter of 2010 versus the fourth quarter of 2009, but anticipates

15 a temporary worsening in efficiency during the second quarter of 2010

16 as additional manufacturing workers will need to be hired and trained to

17 meet a seasonal increased demand for the company's products. The

18 duration and ultimate financial impact of the inefficiencies is difficult to

19 estimate, and the financial impact in future quarters could differ

20 significantly from the level experienced during the first quarter of 20 10.

21. 151. That day, as a result of the Defendants' disclosures, which partially

22 revealed the truth regarding the Company's true financial condition and impact of

23 Defendants' prior misconduct, the Company's stock price dropped 40.51 %, or $1.11

24 per share, from the prior day's close of $2.74 to $1.63, on trading of over 2.8 million

25 shares.

26 152. On July 28, 2010, the Company filed a Form 8-K with the SEC. The

27 Form 8-K announced that Deloitte, the Company's independent registered public

28 accountant, had resigned effective July 22, 2010. The Form 8-K further stated that

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1 "Deloitte advised the Company that certain information has come to Deloitte's

2 attention, that if further investigated may materially impact the reliability of either its

3 previously issued audit report or the underlying consolidated financial statements for

4 the year ended December 31, 2009 included in the Company's 2009 Form 10-K." In

5 response to this news, American Apparel's stock declined 14.36%, to $1.55, on heavy

6 trading.

7 153. Finally, on August 17, 2010, Defendants finally revealed the full effects

8 of their accounting and immigration shenanigans previously concealed from investors.

r 9 That day, the Company issued a press release entitled "American Apparel Reports

10 Preliminary Second Quarter 2010 Financial Results." The press release reported that

11 the Company expected to report a loss of $5 million to $7 million in 2Q10 on net sales

12 of $132 million to $134 million. Moreover, a significant factor in such losses was

13 "lower labor efficiency at the Company's production facilities in the second quarter of

14 2010 compared to the prior year period. The lower labor efficiency was primarily a

15 result of the hiring of over 1,600 net new manufacturing workers during the second

16 quarter of 2010." The press release continued: "[g]ross margin for the second quarter

17 of 2010 is expected to be in the range of 50% to 52%, as compared to 59.0% for the

18 prior year second quarter."

19 154. The August 17, 2010, press release also stated for the first time that, as a

20 result of the Company's poor performance which substantially related to its prior

21 misconduct, its very existence was now in doubt, stating "the Company may not have

22 sufficient liquidity necessary to sustain operations for the next twelve months

23 [which] raise substantial doubt that the Company will be able to continue as a going

24 concern." On this news, shares of the Company's stock tumbled 25.9%, to close on

25 August 17, 2010 at $1.03 per share, on heavy trading volume. As the market

26 continued to digest this news, the Company's stock fell an additional 27.2%, to close

27 on August 19, 2010 at approximately $0.75 per share, on unusually heavy trading

28 volume.

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Case 2:1 0 -cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID#:1256

1 ADDITIONAL INDICIA OF SCIENTER

2 Insider Self-Dealing

3 155. Throughout the Class Period, Charney used American Apparel as a

4 vehicle to enrich himself and his family, at the expense of shareholders. For example,

5 despite his lack of qualifications, Charney appointed his father, an architect, as Sole

6 Director, President, Secretary and Treasurer of two major American Apparel

7 subsidiaries. 20 On April 24, 2009, the SEC sent Charney a letter regarding the

8 Company's April 17, 2009 Proxy Statement, asking why Morris Charney's

9 compensation was not properly disclosed. The SEC noted that "Morris Charney,

10 president of two wholly-owned subsidiaries, received consulting compensation and a

11 C$1 million bonus for contributions to the Company" and asked Charney to "explain

12 why you did not include Morris Charney in the Summary Compensation Table and the

13 Executive Compensation section as a whole."

14 156. On April 27, 2009, the Company responded, confirming that Charney's

15 father was not really fulfilling the duties inherent in hisjob descriptions but, rather,

16 was simply reaping the accompanying financial benefits:

17 We do not believe that Morris Charney is an `Executive Officer' ....Mr.

18 Charney is the father of Dov Charney ... and holds positions at ,two

19 Canadian subsidiaries of the Company. While his title is Sole Director,

20 President, Secretary and Treasurer of American Apparel Canada

21 Wholesale Inc. and Sole Director, President, Secretary and Treasurer of

22 American Apparel Canada Retail Inc., M. Charney does not perform any

23 policy making functions for the Company. Instead, M. Charney provides

24

25

26 20 Similarly, as alleged above, Charney promoted a highly inexperiencedKowaleski as CFO of the Company which enabled him to run American Apparel with

27 little oversight or accountability.

28

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iCase 2:1 0-cv-06352-M MM -JCG Document 66 Filed 04/29/11 of 86 Page ID

#:1257

1 architectural consulting services primarily for stores located in Canada

2 and, in limited cases, the United States."

3 157. In other words, Charney installed his father as the Chief Officer of two

4 Canadian subsidiaries and paid him hundreds of thousands of dollars in yearly

5 commissions (C$198,612 in 2008 alone) and a one million dollar (Canadian) bonus,

6 despite the fact that he did nothing other than provide architectural consulting services

7 primarily for a handful of simple Canadian retail stores.

j 8 158. In addition, upon consummation of the Acquisition with Endeavor,

9 Charney's uncles, mother, sister, father and cousin were all to be paid millions of

10 dollars as holders of underlying notes for the Company's "unsecured indebtedness."

11 The notes had previously provided Charney's family members interest rates of 18%,

12 compounded monthly. As a result of these obscenely high interest rates, for example,

13 Charney's mother received interest of $286,957 on a loan of $575,036 that she had

14 made the previous year. Charney's self-interested actions were taken despite the fact

15 that the Company's Code of Ethics prohibits such transactions, providing that "being

16 in the position of supervising, reviewing or having any influence on the job

17 evaluation, pay or benefit of any close relative" is a conflict of interest .21 True to1

18 character, Charney continued to garner benefits at the expense of shareholders.

19 159. Indeed, even after the Company was fined by ICE, Charney was awarded

20 a performance bonus of between $1,625,000 and $2,375,000. And, after the full

21 impact of the immigration violations came to light, nearly forcing the Company into

22 bankruptcy, the Company granted 6.5 million shares of stock (almost 9% of the

23

24

25 21 Charney and the Company are well aware that such conduct is improper.Indeed, in December 2008 the Company sued its former head of European operations,

26 Bernhard-Axel Ingo Brake, claiming that he hired his daughter to work in a companystore and paid her unwarranted bonuses, in violation of American Apparel's Code of

27 Ethics prohibiting nepotism.

28

-75-


1 Company) to "executive and non -executive management employees and certain

2 consultants" which significantly diluted already depressed shareholder value.az

3 Charney Manipulated the Company to the Shareholders' Detriment

4 160. Charney's detailed knowledge of American Apparel and his ability to

5 exert influence over every aspect of American Apparel's business — including (i) the

6 composition of the Company's Board; (ii) the approval of its auditor; (iii) the level of

7 Defendants' compensation packages and; (iv) the issuance of debt and stock to finance

8 the business — was facilitated by his manipulation of the Company's proxy voting

9 process. Each year during the Class Period, American Apparel solicited multiple

10 "proposals" for shareholder votes on crucial issues at the Company's annual meeting.

11 In the proxies, Charney repeatedly emphasized that "Ly]our vote is very important"

12 and "Lilt is very important that your shares be represented and voted at the Annual

13 Meeting."

14 161. The proxy voting process was a mirage. Throughout the Class Period,

15 Charney controlled the voting rights of more than 52% of the Company's shares

16 (approximately 52.6% in 2008; 53.7% in 2009; 53.3% in 2010). Thus, Charney

17 personally dictated the outcome of every important majority shareholder vote,

18 including proposals that enriched him and were fundamentally prejudicial to

19 shareholders' interests. For example, in the Company's 2008 proxy, dated October

20 29, 2008, American Apparel solicited shareholder votes on three proposals: (1) to

21 reelect three board members; (2) to "ratify" the appointment of Marcum LLP as the

22 Company's auditor for its 2008 financial statements; and (3) to approve the

23 "amendment" of the Company's Performance Equity Plan (i.e., stock compensation

24

25 zz Under the terms of the Acquisition, Chamey was prohibited from selling any26 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 up27 agreement was, subject to certain conditions, extended until December 31, 2013.

28

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1 and bonuses) to "increase the maximum number of shares of Common Stock for

2 issuance thereunder by 3,290,000 shares" and "to increase the maximum number of

3 shares of Common Stock that may be granted as awards thereunder to any one

4 individual in anyone calendar year from 200,000 to 2,500,000."

5 162. For all three proposals, Charney voted his 52.6% shares one way — in

6 favor of ratification —thereby guaranteeing their adoption by a majority vote. In fact,

7 after each "proposal," the Company disclosed that "Dov Charney, the beneficial

8 owner of approximately 52.6% of the outstanding shares of Common Stock and

9 voting power of the Company as of the Record Date, has informed the Company that

10 he intends to vote in favor of proposals 1, 2 and 3, and his vote is sufficient to approve

11 such proposals without further affirmative votes from other stockholders." Thus,

12 Charney was able to control the composition of the Company's Board elections, the

13 hiring of its auditor and — most importantly — the massive increase in stock bonus

14 "awards" that could be granted to any individual (including himself) in any given year

15 to the detriment of shareholders.

16 163. In 2009, the proxy process followed a similar pattern and Charney again

17 controlled the outcome of the voting. In its 2009 Proxy, dated April 29, 2009, the

18 Company introduced four "proposals" for shareholder vote: (1) the election of Capps,

19 Kowalewski and Richardson to the Board; (2) to ratify the appointment of a new

20 auditor (Deloitte); (3) to "approve the issuance of shares of common stock upon

21 exercise of the warrant issued to an affiliate of Lion Capital LLP at a price less than

22 the floor price if the anti-dilution provisions of the warrant so require;" and (4) to

23 approve the Company's "Incentive Compensation Plan."

24 164. The proposal concerning the Lion Capital warrant (Proposal 3) exposed

25 American Apparel shareholders to severe risk of dilution of their shares. Under the

26 terms of the warrant, Lion Capital had the right to 16,000,000 shares of American

27 Apparel stock at $2.00 per share, constituting approximately 18% of the Company.

28 The "proposal" stated that if the Company subsequently issued stock - to raise

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#:1260

1 additional financing at certain lower prices (thereby potentially diluting Lion Capital's

2 stake), Lion Capital was entitled to even more shares of the Company which would

3 make Lion Capital over 20% owner of American Apparel (thereby requiring

4 shareholder approval). Notably, the Company disclosed that the Lion Capital warrant

5 proposal could potentially dilute then-existing shareholders by 16% if the Company's

6 stock price fell to $1.92, only $0.08 below Lion Captial's warrant exercise price. Of

7 course, common shareholders had no say in the matter— the Company disclosed that

8 "Dov Charney, the beneficial owner of approximately 53.7% of the outstanding shares

9 of Common Stock and voting power of the Company as of April 28, 2009, has

10 informed the Company that he intends to vote in favor of this Proposal 3, and his vote

11 is sufficient to approve this Proposal 3 without further affirmative votes from the

12 other stockholders."

13 165. Not surprisingly, Charney also voted his majority shares "in favor" of all

14 three remaining proposals in the 2009 Proxy. His votes were sufficient to constitute a

15 majority and all proposals were adopted. Also, because of a reciprocal "Investment

16 Voting Agreement" between Charney and Lion Capital, both parties agreed, subject to

17 certain conditions, to vote their shares in favor of reelection of each other's Board

18 seats. In other words, Charney voted for Lion Capital, Lion Capital voted for

19 Charney, and both were virtually guaranteed entrenched seats on the Company's

20 Board.

21 166. Charney's ability to control, direct and guarantee the outcome of all

22 proxy votes — including proposals for increases in stock-based bonuses and the

23 dilution of existing shareholders — further reinforces his entrenchment, motive,

24 opportunity and overall scienter during the Class Period.

25 Defendants' False SOX Certifications and GAAP Violations Are26 Further Indicia of Scienter

27167. When considered in tandem with all of the allegations, set forth above,

28 Defendants' SOX certifications filed with American Apparel's 2008, 2009 and 2010

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:i

tCase 2:10- cv-06352-MMM -JCG Document 66 Filed 04/29/11 of 86 Page ID

#:1261

1 Forms 10-Q and 10-K further establish scienter. Throughout the Class Period,

2 Charney and Kowalewski certified, under penalty of perjury, that they had personally

3 reviewed the Forms 10-Q and Forms 10-K, "[d]esigned" and "[e]valuated" American_ 4 Apparel's disclosure controls and evaluated American Apparel's internal controls over

5 financial reporting. Moreover, Charney and Kowalewski certified that the Forms

6 "[do] not contain any untrue statement of a material fact or omit to state a material fact

7 necessary to make the statements made, in light of the circumstances under which

8 such statements were made, not misleading" and that the financial statements 'fairly

t9 present in all material respects the financial condition, results of operations and cash

10 flows of [American Apparel]." Such reviews and evaluations, if performed asi 11 represented, would have alerted the Individual Defendants to the effects of the

12 Company's immigration violations and financial reporting problems.

13 168. The Individual Defendants either knew of the material misstatements or

14 failed to perform the required reviews and falsely represented that they had. In either

15 case, Defendants knew or recklessly disregarded that the SOX certifications Charney

16 and Kowalewski signed were false and misleading. Moreover, to help conceal the .

17 effects of American Apparel's immigration law violations, Defendants violated SEC

18 requirements by making false and misleading disclosures, and omitting to make

19 required disclosures in financial statements .23 Under GAAP, Defendants were

20 required to disclose the likely impacts from significant risks and uncertainties. See

21 AICPA Statement of Position No. 94-6, Disclosure of Certain Significant Risks and

22 Uncertainties. Defendants violated GAAP and SEC requirements by failing to make

23 adequate disclosures regarding the Company's liquidity and ability to continue as a

24

25

= 26 23 "The term `financial statements' as used in this [regulation] shall be deemed toinclude all notes to the statements and all related schedules." SEC Regulation S-X

27 §2 10. 1 -0 1 (b), Application of Regulation S-X.

28

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_E

1 going concern and its failure to comply with immigration regulation and the resulting

2 devastating effect on the Company.

3 169. Defendants' violations of the Company's internal Code of Ethics are also

4 indicative of scienter. For example, Defendants violated their duty to "promote the

5 full, fair, accurate, timely and understandable disclosure in reports and documents that

6 the Company files with, or submits to, the [SEC]" when they, among other things,

7 "withheld from Deloitte the February 2010 monthly financial statements until after the

8 filing of the 2009 10-K and made related misrepresentations." Likewise, in

9 "knowingly" violating immigration laws (and thus incurring fines), Defendants

10 violated their duty to "[o]bserve all applicable governmental laws, rules and

11 regulations."i

12 170. As alleged above, during the Class Period, Defendants violated these

13 internal Company, 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. The 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.

21 PLAINTIFF'S CLASS ACTION ALLEGATIONS

22 171. Plaintiff brings this action as a class action pursuant to Fed. R. Civ. P.

23 23(a) and (b)(3) on behalf of a class of all persons and entities who purchased the

24 publicly traded common stock of American Apparel between November 28, 2007 and

25 August 17, 2010, inclusive (the "Class"). Excluded from the Class are Defendants,

26 directors and officers of American Apparel and their families and affiliates.

27

28

-80-


1 172. The members of the Class are so numerous that joinder of all members is

2 impracticable. The disposition of their claims in a class action will provide substantial

3 benefits to the parties and the Court. While the exact number of Class members is

4 unknown to Plaintiff at the present time and can only be ascertained through

5 appropriate discovery, Plaintiff believes that there are hundreds, if not thousands of

6 members of the Class located throughout the United States. According to the

7 Company's 2009 Annual Report, American Apparel has over 71 million shares of

8 stock outstanding traded on the American Stock Exchange, a national market.

9 173. There is a well-defined community of interest in the questions of law and

10 fact involved in this case. Questions of law and fact common to the members of the

11 Class which predominate over questions which may affect individual Class members

12 include:

13 a. Whether the Securities Exchange Act was violated by Defendants;

14 b. Whether Defendants omitted and/or misrepresented material facts;

15 c. Whether Defendants' statements omitted material facts necessary in

16 order to make the statements made, in light of the circumstances under

17 which they were made, not misleading;

18 d. Whether Defendants knew or recklessly disregarded that their statements7 19 were false and misleading;

20 e. Whether the prices of American Apparel securities were artificially

21 inflated; and

22 f. The extent of damage sustained by Class members and the appropriate

23 measure of damages.

24 174. Plaintiff's claims are typical of those of the Class because Plaintiff and

25 the Class sustained damages from Defendants' wrongful conduct.

26 175. 'Plaintiff will adequately protect the interests of the Class and has retained

27 counsel who are experienced in class action securities litigation. Plaintiff has no

28 interests which conflict with those of the Class.

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t

1 176. A class action is superior to other available methods for the fair and

2 efficient adjudication of this controversy. Plaintiff knows of no difficulty to be

3 encountered in the management of this action that would preclude its maintenance as a

4 class action.

5 Applicability of Presumption of Reliance:

6Fraud on the Market Doctrine

7 177. Plaintiff will rely upon the presumption of reliance established by the

8 fraud-on-the-market doctrine in that, among other things:

9 a. Defendants made public misrepresentations or failed to disclose material

' 10 facts during the Class Period;

11 b. The omissions and misrepresentations were material;

{ 12 C. The Company's securities traded in an efficient market;

13 d. The misrepresentations alleged would tend to induce a reasonable

14 investor to misjudge the value of the Company's securities; and

15 e. Plaintiff and other members of the Class purchased American Apparel

16 securities between the time Defendants misrepresented or failed to

17 disclose material facts and the time the true facts were disclosed, without

18 knowledge of the misrepresented or omitted facts.

19 178. At all relevant times, the market for American Apparel securities was

20 efficient for the following reasons, among others: (a) as a regulated issuer, American

21 Apparel filed periodic public reports with the SEC; and (b) American Apparel

22 regularly communicated with public investors via established market communication

23 mechanisms, including through regular disseminations of press releases on the major

24 news wire services and through other wide-ranging public disclosures, such as

25 communications with the financial press, securities analysts and other similar

26 reporting services.

27

28

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1 Applicability of the Affiliated Ute Presumption of Reliance

2 179. Plaintiff are also entitled to the Affiliated Ute presumption of reliance

3 because Defendants' fraudulent scheme also involved a failure to disclose and/or

4 concealment of material facts concerning Defendants' overall financial condition and

5 operations, which information the market was entitled to know and which may have

6 caused investors not to purchased shares of American Apparel at the prices theyi

7 traded during the Class Period.

8 NO SAFE HARBOR

9 180. Defendants' verbal "Safe Harbor" warnings accompanying its oral

10 forward-looking statements issued during the Class Period were ineffective to shieldi

11 those statements from liability.

12 181. The Defendants are also liable for any false or misleading forward-

13 looking statements pleaded because, at the time each forward-loolcirig statement was

14 made, the speaker knew the forward-looking statement was false or misleading and

15 the forward-looking statement was authorized and/or approved by an executive officer

16 of American Apparel who knew that the forward-looking statement was false. None

17 of the historic or present tense statements made by Defendants were assumptions

-' 18 underlying or relating to any plan, projection or statement of future economic119 performance, as they were not stated to be such assumptions underlying or relating to

20 any projection or statement of future economic performance when made, nor were any

21 of the projections or forecasts made by Defendants expressly related to or stated to be

22 dependent on those historic or present tense statements when made.

23 FIRST CLAIM

24 Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated

25 Thereunder Against All Defendants (Except Lion Capital)

26 182. Plaintiff repeats and realleges each and every allegation contained above

27 as if fully set forth herein.

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1 183. During the Class Period, American Apparel and the Individual

2 Defendants carried out a plan, scheme and course of conduct which was intended to

3 and, throughout the Class Period, did: (i) deceive the investing public, including

4 Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and other

5 members of the Class to purchase American Apparel securities at artificially inflated

6 prices. In furtherance of this unlawful scheme, plan and course of conduct, these

7 Defendants, and each of them, took the actions set forth herein.

8 184. American Apparel and the Individual Defendants: (i) employed devices,

9 schemes, and artifices to defraud; (ii) made untrue statements of material fact and/or

10 omitted to state material facts necessary to make the statements not misleading; and

11 (iii) engaged in acts, practices, and a course of business which operated as a fraud and

12 deceit upon the purchasers of the Company's securities in an effort to maintain

13 artificially high market prices for American Apparel securities in violation of §10(b)

14 of the Exchange Act and Rule l Ob-5. These Defendants are sued either as primary

15 participants in the wrongful and illegal conduct charged herein or as controlling

16 persons.

17 SECOND CLAIM

18 Violation of Section 20(a) of the Exchange Act Against the Individual-a

19Defendants and Lion Capital

20 185. Plaintiff repeats and realleges each and every allegation contained above

21 as if fully set forth herein.

22 186. The Individual Defendants and Lion Capital acted as controlling persons

23 of American Apparel within the meaning of §20(a) of the Exchange Act as alleged

24 herein. By virtue of their high-level positions, and their ownership and contractual

25 rights, participation in and/or awareness of the Company's operations and/or intimate

26 knowledge of the false financial statements filed by the Company with the SEC and

27 disseminated to the investing public, the Individual Defendants and Lion Capital had

28 the power to influence and control and did influence and control, directly or indirectly,

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#:1267

1 the decision-making of the Company, including the content and dissemination of the

2 various statements which Plaintiff contends are false and misleading. These

3 Defendants were provided with or had unlimited access to copies of the Company's

4 reports, press releases, public filings and other statements alleged by Plaintiff to be

5 misleading prior to and/or shortly after these statements were issued and had the

6 ability to prevent the issuance of the statements or cause the statements to be

7 corrected.

8 187. In particular, each of the Individual Defendants had direct and

9 supervisory involvement in the day-to-day operations of the Company and, therefore

10 are presumed to have had the power to control or influence the particular transactions

11 giving rise to the securities violations as alleged herein, and exercised the same.

12 188. As set forth above, American Apparel and the Individual Defendants

13 each violated § 10(b) of the Exchange Act and Rule l Ob-5 by their acts and omissions

14 as alleged in this complaint. By virtue of their positions as controlling persons, the

15 Individual Defendants are liable pursuant to §20(a) of the Exchange Act. As a direct

16 and proximate result of these Defendants' wrongful conduct, Plaintiff and other

17 members of the Class suffered damages in connection with their purchases of the

18 Company's securities during the Class Period. In addition, Lion . Capital's financial

19 interest in the Company gave Lion Capital a nearly 20% ownership interest in

20 American Apparel and the stock warrants given to Lion Capital, if exercised, could

21 have diluted Charney's American Apparel equity stake from majority to a non-

22 majority stock owner.

23 WHEREFORE, Plaintiff prays for relief and judgment, as follows:

24 a. Determining that this action is a proper class action under Rule 23 of the

25 Federal Rules of Civil Procedure;

26 b. Awarding compensatory damages and equitable relief in favor of

27 Plaintiff and the other Class members against all Defendants, jointly and

28 severally, for all damages sustained as a result of Defendants'

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1

1 wrongdoing, in an amount to be proven at trial, including interest

2 thereon;

3 C. Awarding Plaintiff and the Class their reasonable costs and expenses

4 incurred in this action, including counsel fees and expert fees; and

5 d. Such equitable and other relief as the Court may deem just and. proper.

6 JURY TRIAL DEMANDED

7 Plaintiff hereby demands a trial by jury.

8

9 DATED: April 29, 2011 B • ' t I WAY T i ' • Z KESSLERM TZ. ECK, LLP

10, ^f

11 ^^`Ramzi Abadou

12 Stacey Kaplan

13Erik D. Peterson580 California Street, Suite 1750

14 --- - - - - San Francisco, CA 94104---

15Telephone: (415) 400-3000Facsimile: (415) 400-3001

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17 Lead Counsel

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1 DECLARATION OF SERVICE BY MAIL

2 I, the undersigned, declare:

3 1. That declarant is and was, at all times herein mentioned, a citizen of the

4 United States and employed in the City and County of San Francisco, over the age of

5 18 years, and not a party to or interested party in the within action; that declarant'siE

6 business address is 580 California Street, Suite 1750, San Francisco, CA 94104.i 7

2. That on April 29, 2011,. declarant served the - following document by8

depositing a true copy thereof in a United States mailbox at San Francisco, California

9 in a sealed envelope with postage thereon fully prepaid and addressed to the following10 parties:11

Harriet S. Posner

12 Skadden Arps Slate Meagher & Flom300 S Grand Ave, Ste 3400

13 Los Angeles, CA 90071-3144

- - - 14 Seth-A.-AronsonAmy J. Longo

15 O'Melveny and Myers LLP400 South Hope Street

16 Los Angeles, CA 90071

17 I declare under penalty of perjury under the laws of the United States of

18 America that the foregoing is true and correct. Executed on April 29, 2011, at San

19 Francisco, CA.

20

21 , athe - :uyen

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1 Consolidated Class Action Complaint For Violation Of Federal Securities Laws 04/29/2011

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Transcript of 1 Consolidated Class Action Complaint For Violation Of Federal Securities Laws 04/29/2011