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In American Apparel's Financial Crisis, CEO Charney Did Very Nicely, Thank You

If you thought American Apparel (APP) CEO Dov Charney spent 2009 driving his company into debt, flirting with corporate bankruptcy, defending two lawsuits alleging employees were sexually harassed, and therefore didn't deserve a bonus, then you were wrong.

According to a proxy filing with the SEC -- the disclosure in which Charney's compensation is detailed -- Charney received a bonus of $1.1 million last year. His total compensation was $1.9 million:


Charney's bonuses are linked to earnings, same-store sales and inventory levels. Same-store sales were down 11.4 percent in the period covered by the form, so how did Charney still get a bonus? By performing on the earnings and inventory levels. Charney controls both those factors: he can order new inventory made or production halted anytime he wants; and manufacturing expenses, another major factor in AA's earnings margin, would also go up or down as a result.

Charney also uses AA the same way the rest of use our savings accounts, but on much better terms, the proxy form says. He loaned $6 million Canadian to AA at 6 percent interest in 2007 -- a far higher rate than you'll get at a high street bank -- and the company has yet to pay back the last $922,718 of that. "No interest was paid during 2009," the proxy says.

Charney then loaned another $2.5 million to AA in December 2008, sparking fears the company was bankrupt, in exchange for another note at 6 percent -- again, far higher than regular interest rates. In February 2009 he loaned AA another $4 million, through 2013. It's worked out very nicely for Charney, per the proxy:

The largest aggregate amount of principal outstanding during fiscal year 2009 was $6,500,000 and $182,352 of interest was accrued. As of December 31, 2009, the outstanding balance was $3,432,352.
On those numbers, interest on his loans to AA form an additional 10 percent of Charney's total compensation. A spokesman for AA said there was nothing wrong with the loans, and referred me a statement the company made about them last year (see the comments section):
The $4 million investment was by no means nefarious. Officers are not allowed to offer interest-less loans to a company. The 6% interest rate from Dov is actually much lower than the rate American Apparel would have paid if it was forced to borrow from another source. (probably 9 and 11%) For example, the loan from LION capital as of this week has an attached interest rate of 15%.
Charney's control of his company is now more restricted than it once was. Lion Capital, whose financing has kept AA from bankruptcy court, now controls three of 12 directors -- including Charney himself -- on the board, in addition to the new president of AA, which Lion installed in October. (Charney and Lion have a stock-voting agreement, but as AA doesn't exist but for Lion's largesse, there's no chance of Charney voting Lion's stock against its will.)

That's not the only sword dangling over Charney's head. If he is fired for "cause," he gets no severance payments. Normally, CEOs don't have to worry about that. And Charney owns 53 percent of the stock, so he's especially safe, on paper. But AA is beset by lawsuits, at least two of which allege harassment of female employees. Charney has been sued and settled harassment cases before. Should either of those suits make it to a verdict that goes against Charney, the company's board -- now under considerable sway from Lion -- could in theory fire Charney and not have to pay him a penny.

Considering that it was Charney's "leadership" that landed the company in the trouble it's in, that's not a completely implausible scenario. In the alternative, Lion could terminate him without cause and pay only about $3.9 million in severance fees on 2009's numbers -- a relative bargain for axing a U.S. CEO.

And finally: As these October ads from AA indicate, the company has moved away from its flirtation with nonsexual, fully clothed models in its promotions and gone back to its, er, roots.

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