Bain sues EY over $60m loss

The buyout giant claims that it made an investment based on fabricated financial statements audited by EY, according to reports.

Bain Capital Partners is suing EY, alleging that the Big Four accounting firm advised it to invest in children's clothing company Lilliput Kidswear on the basis of falsified financial statements that EY had previously audited and certified, according to a copy of the lawsuit seen by Reuters.

Bain Capital Partners LLC, and 10 other subsidiaries of the private equity firm, sued Ernst & Young Global Limited and Ernst & Young LLP in Suffolk County Court. The claim suggests the audit firm has cost Bain roughly $60 million, since the Lilliput investment is now “rendered worthless”.

“Acting as seller's agent, EY solicited Bain to invest in Lilliput and gave Bain Lilliput's financial statements, which EY had audited and certified as presenting a true and fair view of the company,” the claim states.

A Bain Capital spokesperson declined to comment.

In an email to Private Equity International, an EY spokesperson said: “These allegations of wrongdoing are baseless and EY will vigorously defend this matter.”

Bain invested in Lilliput in 2010 and planned to eventually take the company to an initial public offering (IPO). Reports back in 2012 said that Bain was alerted to problems with the accounts at Lilliput via a call from a whistleblower, soon after an IPO for the company was approved.

Bain put the brakes on the Lilliput IPO process after investigating the whistleblower's claims and finding sales at the company had been inflated. “Lilliput had systematically falsified its revenues, costs, and loans outstanding. In order to artificially inflate revenue, Lilliput added imaginary 'fake' sales on top of legitimate 'actual' sales,” the US group said in the suit.

The complaint further alleges Bain was specifically targeted by EY to invest in Lilliput, because the firm had the resources to pay a higher investment price, plus the market standing and knowledge to take the company to an IPO.