American Apparel pays $4.8m to investors misled over immigrant workers

The American clothing company American Apparel has paid $4.8m to settle a claim brought by shareholders in the US Federal Court in New York. The shareholders claimed that American Apparel had risked their investment by hiring thousands of workers who were living in the US illegally.

The events behind the case took place between 2007 and 2008. In 2007, the shareholders claim, the company learned that US Immigration and Customs Enforcement (ICE) was planning an inspection of its California manufacturing plant.

They say that the company did not inform them of the inspection until March 2008. They also claim that Dov Charney, the founder of the company, had misled them about the incident.

One third of workers were illegal

When the ICE inspection came, it found that one third of American Apparel staff, thousands of workers, were illegal residents, many from Mexico. These workers had their employment contracts terminated after it was discovered that they were working illegally.

This caused the share price to fall by 16%, thereby causing the shareholders financial loss.

American Apparel denies deliberately misleading shareholders. It also denies that the shareholders suffered any financial loss. The company maintains that it was likely that the shareholders would lose if the court went through the entire appeal process.

Settlement is 'fair'

But lawyers for the company say that the settlement is fair 'given the risk and uncertainty of further litigation'. The company has also agreed to pay up to $1.2m in legal fees and expenses of $300,000.

American Apparel founder, Dov Charney is an immigrant himself having been born in Montreal, Canada in 1969. He 'fell in love with the USA' as a boy and moved to South Carolina in 1987.

He founded American Apparel in 1991. In 1997, the company had financial problems and he filed for Chapter 11 bankruptcy and relocated to California in 1997. By 2003, he employed well over 1,000 people.

No sweatshops

Mr Charney marketed American Apparel as a company that did not use sweatshops and made all its products in the USA. The allegation that he was using illegal labour therefore might have 'damaged the brand'.

Mr Charney has previously been sued by several former employees who alleged sexual harassment and by the film director Woody Allen. Mr Allen sued for $10m in 2008 after the company used his image, dressed as a Hassidic Jew on billboards and in advertisements.

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