Bain Capital sues EY over $60 million loss in Lilliput Kidswear

NEW DELHI: Global private equity firm Bain Capital Partners LLC is suing EY in a US court, claiming that the auditing firm cost it roughly $60 million by advising it to invest in Lilliput Kidswear, the children's clothing company.

Bain alleges that it invested around $60 million in Lilliput in May 2010 for a non-controlling 30.99% stake, based on false financial statements that EY, previously known as Ernst & Young, had audited and certified, according to a copy of the lawsuit seen by Reuters.

The PE firm and ten of its subsidiaries have sued Ernst & Young Global Limited and Ernst & Young LLP in a Massachusetts court, claiming that the investment is now “rendered worthless”. Once a fast-growing kidswear company, Lilliput ran into trouble in 2011 after an internal investigation by Bain concluded that the Sanjiv Narularun firm was falsifying its accounts.


Bain along with TPG, the second PE investor, prevented Lilliput from going ahead with IPO and deprived it of funds. The company soon ran into financial difficulties. Narula, in turn, moved the Delhi High Court, accusing the private equity investors of trying to take over the company. An independent, court-appointed auditor reviewing Lilliput’s financials uncovered evidence of widespread fraud and discrepancies.

Allegations Baseless: EY

Amid all these developments, SR Batliboi, an EY member firm, resigned as the statutory auditor of the company.ET has learnt that in the plaint filed in a court in Massachusetts, Bain has levelled a series of serious allegations against EY. It has said that acting as statutory auditor for Lilliput, Ernst & Young knew about key aspects of a fraudulent scheme to systematically falsify and misrepresent the revenues, costs, inventory and indebtedness of the company.

The false financial information provided by EY improperly presented Lilliput as a thriving, reputable business. Bain has further alleged that acting as advisor and seller’s agent for Lilliput, EY played a central role in inducing it to make a $60-million investment in Lilliput and to maintain its investment in the company over time, causing the firm to lose all its invested capital.

According to Bain, EY’s twin roles as Lilliput’s advisor and auditor represented a clear conflict of interest. It has alleged that the accounting firm’s internal audit work papers acknowledged that the kidswear company was improperly recognising revenue before it was earned.