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Exclusive: American Apparel finds CEO misused funds; helped discredit employee - source

By Nadia Damouni and Jeffrey Dastin

NEW YORK (Reuters) - An internal investigation at American Apparel Inc has found that its CEO Dov Charney violated company policies, ranging from misusing company funds to failing to stop the discrediting of at least one former employee who had accused him of sexual harassment, a person close to the matter said.

The company’s board ousted the 45-year-old Charney as chairman on Wednesday, citing unspecified allegations of misconduct. It suspended him as president and chief executive officer, and plans to fire him for cause, following a 30-day period stipulated in his contract.

The company's independent directors hired law firm Jones Day in mid-March to lead the investigation, said the person and a separate source familiar with the matter. It is unclear what events prompted the board to initiate the investigation, which is ongoing.

The probe revealed that Charney, who founded the hipster clothing brand, was using company funds to book flights for his parents, the person said. He also sometimes provided corporate apartments to friends and stayed in them himself when he wasn’t on company business, according to this person.

The investigation’s findings also included that Charney had known about but failed to stop a blog created by an American Apparel employee that displayed naked photographs of former saleswoman, Irene Morales, who had sued him, the person said.

A person familiar with Charney's thinking said that any use of photographs of the former employee by American Apparel was only done to counter her damaging allegations and the strategy was approved by other company officials.

This person said that Charney believed any use of apartments was not material and was normal business practice. In terms of the travel charges, this person said Charney’s father is on American Apparel’s payroll and that his mother, although not an employee, is a retail and design contributor to the company.

Charney's employment contract entitled him to "vacation benefits and reimbursement of reasonable and necessary business expenses," according to a company filing in April. His father, Morris Charney, received $238,000 in architectural consulting and director fees from the company in 2013, the filing showed.

A spokesman for American Apparel declined to comment. A representative for Jones Day was not immediately available for comment.

The company, which only has a market value of $120 million, has been struggling with weak sales and heavy debt. While the industry lauded Charney for his creativity, the company has been under fire for lax financial controls and concerns about the strength of its management team.

In recent years, Charney has fought off a series of sexual harassment lawsuits. In one of the most high-profile cases, Morales claimed she was held as a teenage sex slave, forced to perform sexual acts during an eight-month period, including oral sex in Charney's Manhattan apartment just after she turned 18.

A lawyer for American Apparel said in 2011 that it was Morales who had stalked Charney and was trying to "shake down" the company.

In 2012, a New York judge ordered her $250 million claim to be arbitrated. The status of the arbitration proceedings could not be immediately determined.

American Apparel is in talks to hire an investment bank, expected to be boutique Peter J. Solomon, one of the people close to the matter said. The bank, which could not be immediately reached for comment, will provide capital if the company's lenders declare it in default on some of its debt, the person said.

(Reporting By Nadia Damouni and Jeffrey Dastin; Editing by Jilian Mincer and Martin Howell)

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