American Apparel Inc. Long Term Investor Files Lawsuit

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Company Name(s): 
American Apparel
Case Name: 
American Apparel Derivative Action 09/01/2010
Case Status: 
Lawsuit Filed
Case Status: 
Case Dismissed
Affected Securities
Lawsuit Overview
Type of Lawsuit: 
Shareholder Derivative Action
Date Filed: 

July 31, 2012 (Update) -- U.S. District Judge Margaret Morrow dismissed a consolidated shareholder suit against American Apparel Inc.

September 1, 2010 -- A current investor in American Apparel Inc. (AMEX:APP) filed a lawsuit against certain member of the board of directors of American Apparel alleging breaches of fiduciary duty. This lawsuit follows a previous lawsuit by another American Apparel investor filed on behalf of purchasers of American Apparel common stock during the period between December 20, 2006 and August 17, 2010 against American Apparel over alleged violations of Federal Securities Laws.

American Apparel, Inc., located in Los Angeles, California, is a vertically-integrated manufacturer, distributor and retailer of branded fashion basic apparel. According to the complaint filed on behalf of purchasers of American Apparel common stock during the period between December 20, 2006 and August 17, 2010, the plaintiff alleges, that American Apparel and certain of its officers and directors violated the Securities Exchange Act of 1934 by issuing between December 20, 2006 and August 17, 2010, false and misleading statements about its hiring practices and the effect of such hiring practices on the its financial performance..

On March 31, 2010, American Apparel, Inc. disclosed an audit report issued by Deloitte & Touche, LLP. According to the investigation the report identified material weaknesses in American Apparel's internal controls over financial reporting and their financial closing and reporting processes.
Then on July 22, 2010, Deloitte resigned as the independent registered public accounting firm of American Apparel, having serves as the Company’s independent registered public accounting firm since April 3, 2009. On July 26, 2010, the Audit Committee had engaged Marcum LLP as the Company’s independent auditors to audit the Company’s financial statements.

On July 29, 2010, after Deloitte's resignation was announced to the public, American Apparel shares dropped from $1.81 per share to close at $1.55 per share. American Apparel Inc. (APP) paid in 2007 twice dividends of 75Cents per share and rose from $9.18 per share in January 2007 to over $15 per share in December 2007. During 2008 APP shares lost over 80% of its value and traded as low as $1.82 per share in December 08. During 2009 APP shares recovered and traded as high as $6.60 per share in May 2009, but lost again substantially value and traded recently at $1.44 per share, even below its low from December 2008. American Apparel’s Total Revenue more than doubled within in the past four years from $284.97million in 2006 to $558.77million in 2009. While American Apparel Inc. had to report a Net Loss of $1.61million in 2006, it reported a two digit million Net Income in 2007 and 2008, $15.48million, respectively $14.11million. But American Apparel’s Net Income diminished in 2009 to slightly over $1.1million and according to the complaint American Apparel, which has not filed financial statements for the past two fiscal quarters, is "on the verge of being delisted from the New York Stock Exchange."

On August 17, 2010, The New York Times reported that American Apparel received a federal subpoena in New York related to its problems with Deloitte & Touche. American Apparel stock went from $1.40 on Monday August 16, 2010, to roughly $1.10 per share on Tuesday, and declined to as low as $0.73 per share on Wednesday August 18, 2010.

Then, on August 17, 2010, American Apparel issued a press release announcing that it expected to report a loss of $5 million to $7 million in the second quarter of 2010 on net sales of $132 million to $143 million. According to the press release, a significant factor in such losses was "lower labor efficiency at the Company's production facilities in the second quarter of 2010 compared to the prior year period. The lower labor efficiency was primarily a result of the hiring of over 1,600 net new manufacturing workers during the second quarter of 2010." By August 18, 2010, as this news was digested by the market, American Apparel's stock price had declined, from a close of $1.39 per share on August 16, 2010, to a close of just $0.81 per share on August 18, 2010 -- a decline of over 41%. American Apparel shares recovered recently to $1.07 per share.