Bain sues Big Four auditor over India kidswear deal
Bain Capital is taking legal action against EY – formerly Ernst & Young – in a US court, alleging that its now worthless investment in India’s Lilliput Kidswear was made on the basis of false financial statements that the accounting firm had audited.
According to Reuters, Bain and 10 of its subsidiaries have sued Ernst & Young in Suffolk County Court in Massachusetts for "fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practices based on EY's involvement in the scheme to defraud Bain."
They allege that Bain was specifically targeted by EY - which was Lilliput's financial advisor and auditor - to invest in the company because it had the means to pay a high valuation, as well as for its prestige and IPO knowhow. They also claim that EY continued to certify Lilliput financial statements "even as Lilliput's fraud grew with EY's active assistance."
The accounting firm said the allegations of wrongdoing are baseless and that it would vigorously defend the matter.
Bain invested approximately $60 million in Lilliput in May 2010, taking a 30.99% stake in the children's clothing retailer. TPG committed $26 million at the same time for an approximately 14% stake.
Two years on, the investors were tipped off last year about irregularities in Lilliput's financial statements. They refused to approve the company's annual accounts, preventing a planned IPO. Sanjeev Narula, founder of Lilliput, said Bain and TPG were trying to seize control of the company and he obtained an injunction that prevented the PE firms from selling their stakes or discussing the matter publicly.
Following an independent audit ordered by a court in November 2011, Bain and TPG applied to Delhi High Court in April 2012 to make the report public. They also asked the court to prevent Narula from threatening them and appoint a local commissioner to take possession of Lilliput's account books and other records.
The petition highlighted a number of financial irregularities, including alleged discrepancies between bank statements detailing the company's transactions and its audited accounts and bank ledger. Narula denied the allegations, saying that Bain was trying to obstruct potential deals with other PE firms. He earlier stated that L Capital Asia and another investor wanted to take a majority stake in Lilliput, facilitating the exit of Bain and TPG. Narula said in May 2012 that the deal was off.
Lilliput embarked on an ambitious expansion plan ahead of its planned IPO, adding 600,000 square feet of retail space in two years, equal to the total amount added over the previous eight years. The company's debt exposure is said to have increased substantially to finance this expansion.
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