The government of Malaysia, its Ministry of Finance Inc (MoF Inc), 1Malaysia Development Bhd (1MDB) and various subsidiaries have filed a US$5.64 billion suit against 44 partners of KPMG Malaysia during the time the firm was 1MDB’s auditors.
The lawsuit was filed on Tuesday (July 6).
The suit alleged breaches of contract and negligence in the audit and certification of 1MDB’s financial statements for financial year March 31, 2010 (FY10), FY11 and FY12.
KPMG was sacked as auditor after it refused to sign off the FY13 accounts.
Besides 1MDB, the government and MoF Inc, the other plaintiffs are 1MDB Energy Holdings Ltd (1MEHL), 1MDB Energy Ltd (1MEL), 1MDB Energy (Langat) Ltd (1MELL), and Global Diversified Investment Company Ltd, formerly known as 1MDB Global Investment Company Ltd.
Messrs Shearn Delamore filed the 148-page statement of claim on their behalf.
This is the second 1MDB related suit filed by Shearn Delamore. They had also filed a suit against Riza Aziz, his production company Red Granite Pictures Inc, Red Granite Capital Ltd and New York-based law firm Shearman & Sterling.
Twenty-two civil suits were also filed by 1MDB against various parties in May.
1MDB and its former subsidiary SRC International Sdn Bhd had settled its dispute with Deloitte PLT, which took over as auditor after KPMG was sacked. Deloitte paid US$80 million (RM336 million) into the government’s 1MDB recovery trust account last month.
Alleged breach of contract and negligence
In the statement of claim sighted by theedgemarkets.com, the plaintiffs said that between 2009 and 2014, some US$5.64 billion had been misappropriated from 1MDB and its related subsidiaries to the benefit of former premier Datuk Seri Najib Razak and his associates or nominees.
Of the US$5.64 billion, a sum of US$3.197 billion was misappropriated during the three financial years when KPMG was the auditor, namely FY10, FY11 and FY12.
The statement of claim stated that initially Ernst & Young (E&Y) was appointed to audit 1MDB accounts, but it had not been able to conclude its audit, due to the lack of sufficient appropriate audit evidence in respect of the fair value and recoverability of 1MDB’s purported investment in its early joint venture (JV).
Hence, in September 2010, Najib directed that E&Y be removed as 1MDB’s statutory auditor and KPMG be appointed. KPMG commenced its audit work on Sept 14, 2010, and promised to complete its audit within 18 days by Oct 4, 2010. The audit firm issued its unqualified audit opinion on Oct 4, 2010.
JV with PetroSaudi
The statement of claim further states that 1MDB entered into a JV with PetroSaudi International, after it had obtained the RM5 billion Islamic Medium Term Notes (IMTN) where a sum of US$1 billion was agreed in exchange for 40% of the equity stake in 1MDB PetroSaudi Ltd, a British Virgin Islands registered company.
However, instead of money going to the JV company, 1MDB PetroSaudi, a sum of US$700 million was misappropriated to Good Star Ltd, a company controlled by Low Taek Jho.
Subsequently, in June 2010, Najib and 1MDB’s management under the former premier’s direction sought to inflate the value of 1MDB’s investment in the JV with PetroSaudi by restructuring its 40% equity stake into the Murabaha Notes, the plaintiffs alleged.
The restructuring was backdated to March 31, 2010, as recording a profit of RM652 million in the year then ended. This enabled a total profit of RM425 million to be reported by 1MDB (instead of it reporting a loss of RM227 million) in that financial year, thus concealing the misappropriation of funds from 1MDB.
The statement of claim further stated that in or around September 2010, Najib and the management fraudulently recorded a further investment by 1MDB of US$500 million in 1MDB PetroSaudi in the form of additional subscription of Murabaha Notes for the ostensible purpose of the acquisition by the JV company of 4.23% of the equity in a public listed company in France.
The proposed acquisition never materialised and the US$500 million was misappropriated to parties related to PetroSaudi and parties related to Najib, to 1MDB’s detriment.
In May 2011, Najib and the 1MDB management then again fraudulently caused a further purported investment of US$330 million in 1MDB PetroSaudi in the form of additional Murabaha Notes, to finance its purported projects in the oil and gas sector. However, the fund of US$330 million was again misappropriated to Good Star.
The plaintiffs claimed that none of the fraudulent transactions and misappropriations carried out under Najib’s directive and implemented by the then management was spotted by KPMG during its tenure as the auditors of 1MDB.
Instead, they alleged that KPMG issued unqualified audit opinions on 1MDB’s financial statements for each of the relevant years FY10 to FY12.
The claimants said that contrary to the opinions expressed by KPMG in its audit reports, the audited financial statements for those years did not give a true and fair view of the financial affairs of 1MDB.
The plaintiffs further claimed that had a true audit picture been revealed it could have prevented further transactions or further issuance of bonds that would lead to transactions in what is known as the Tanore and Aabar phases in 2013 and 2014 that resulted in further misappropriations.
Hence, the plaintiffs are claiming from KPMG a total of US$5.64 billion arising from the misappropriated funds of US$1.83 billion from the fraudulent PetroSaudi JV, US$1.367 billion from 1MDB to Aabar British Virgin Islands (BVI) for security deposits.
Others are misappropriation of US$1.59 billion from the proceeds of 1MDB Global Investment Ltd bonds to Overseas Investment Funds, misappropriation of US$856,317 million from the proceeds of two syndicated term loans procured by 1MEHL to Aabar BVI and Aabar Seychelles purportedly for the purpose of extinguishing what was known as the Aabar Options.
The statement of claim also said that as of May 6 this year, interest of at least US$1.43 billion has accrued from the US$5.64 billion.
Presently, Najib is facing a plethora of criminal charges in relation to SRC and 1MDB related transactions in five trials, with one involving SRC having been concluded and he was sentenced to 12 years’ jail and fined RM210 million. He is appealing the verdict.
Besides Deloitte, Goldman Sachs and AmBank have paid US$2.5 billion and RM2.83 billion respectively to 1MDB as settlement for their role in the fraud that took place from bonds they helped to raise. – The Edge Markets