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U.S. Business Charney’s fate at American Apparel will fall to third-party investigation

Dov Charney, the controversial founder of American Apparel, is seen at the downtown Los Angeles factory in 2011.

ANN JOHANSSON/NYT

Dov Charney's future at American Apparel Inc. is no longer in his hands. Instead, the embattled Montreal-born founder of the once-successful clothing chain will have his fate decided by a high-powered consulting firm known for its work on some of the biggest crises in North American business.

As part of an agreement struck late Wednesday to stabilize American Apparel with new capital, the company's board has retained Washington, D.C.-based FTI Consulting to investigate the conduct of Mr. Charney, who was removed as chief executive officer last month.

Mr. Charney was ousted as chairman and CEO June 18 after the company alleged he tried to discredit a former employee who accused him of sexual harassment. It is one of several harassment allegations that have been made against Mr. Charney during his time running American Apparel. Since being removed, Mr. Charney has been fighting to regain control of the company he started, and struck a deal with New York hedge fund Standard General LP, which has agreed to recapitalize American Apparel with up to $25-million (U.S.) of new funds.

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Mr. Charney owned 27 per cent of the company before the battle began. Teaming up with Standard General created a powerful force, with a combined 43 per cent of the shares. However, as a condition of that alliance, Mr. Charney turned over more power to Standard General, relinquished his voting rights to the hedge fund.

Whether or not Mr. Charney will be reinstated as the CEO of the company, or will be shut out from its operations, will depend on the results of an independent investigation into his conduct, and the allegations against him, led by a committee of the company's board. That probe is being handled by FTI, a firm with a long resume of handling corporate crises. FTI advised one of the oil companies involved in the Gulf oil spill in 2010, and advised the oil shipper linked to the train of crude oil that exploded in Lac-Mégantic last summer.

In a statement announcing the deal with Standard General to recapitalize American Apparel, the company said the investigation will be the deciding factor as to whether Mr. Charney will be back at the company. Until then, he is limited to the role of "strategic consultant" and does not have direct access to his company e-mail, or the corporate computer system, according to regulatory filings.

"Based on the investigation, the committee will determine if it is appropriate for Mr. Charney to serve as CEO or an officer or employee of American Apparel," the announcement said.

Mr. Charney, who could not be reached for comment, has been a polarizing figure atop American Apparel for years. The company has been lauded for its anti-sweat-shop stance, and its efforts to manufacture clothing in Los Angeles, while other retailers have moved the work offshore. However, Mr. Charney has been clouded by allegations of strange behaviour involving female employees that have culminated, in some cases, in harassment allegations.

The company's board is being reconstituted as part of the deal, with five of the seven members stepping down and being replaced by new appointments. The two board members staying in place are current co-chairmen David Danziger and Allan Mayer.

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