Deloitte's letter to the SEC claiming that American Apparel (APP) withheld financial information from it in February 2010 ought to be the final straw: It's time this troubled fashion advertiser was moved to the top of the feds' to-do list with a thorough investigation. Investors have lost millions on its now-penny stock. American Apparel disclosed today this set of communications with its former auditor:
On December 15, 2010, the Audit Committee of the Company received notice from Deloitte stating that ... Deloitte's report on the Company's previously issued consolidated financial statements as of and for the year ended December 31, 2009 ... should not be relied upon ...
... due to Deloitte's belief that management withheld from Deloitte the February 2010 monthly financial statements until after the filing of the 2009 10-K and made related misrepresentations.The company is doing an internal investigation but Deloitte wrote separately to the SEC to say it doesn't believe AA's version of events.
This isn't a mere disagreement about whether CEO Dov Charney sent over a spreadsheet in a timely fashion. It's the latest in a line of intrigues at the firm that suggest something is rotten in the world of naked ads, assless pantyhose and sparkly leggings:
- Charney and other members of management just rewarded themselves with 9.1 percent of the company's stock, at a time when its price was the cheapest it's been, despite declining sales all year.
- Charney is padding his compensation with personal loans to the company at 6 percent interest even though the company secured emergency financing from Lion Capital earlier in the year.
- Sales are down, yet the company is moving its product mix into clothes that cost more to make (ad and admin expenses are up too), and at the same it's pursuing a discount strategy with Groupon and others. This is financial suicide if left unchecked.
- The company was already the subject of an "inquiry" by the SEC and and a subpoena from the Department of Justice, but no details have been given. It would be nice if employees and investors got some visibility on what authorities believe is wrong.
CEO Dov Charney is not "padding his compensation with personal loans" to the company. His loans have been on far more favorable terms than made available by other lenders. The reasonable interest he gets is not "padding" his compensation for his work as the CEO. This is hardly rocket science.His full rebuttal is in the comments section below.
No government agency that we know of at this time thinks anyone did anything wrong. The SEC subpoena issued to American Apparel specifically says this.
The company will investigate these issues further but at this time has no reason to believe that anyone employed by the company has acted other than with integrity and the highest ethical standards throughout this process.