This article first appeared in The Edge Malaysia Weekly on November 4, 2019 - November 10, 2019

1MALAYSIA Development Bhd (1MDB) must have been a real sucker, given how easily it was conned of billions of ringgit by PetroSaudi International Ltd (PSI), defence counsel Tan Sri Muhammad Shafee Abdullah implied last week during cross-examination of Datuk Shahrol Azral Ibrahim Halmi, former CEO of the  strategic investment company.

Despite half, if not fully, suspecting it had already been taken for a ride by the Saudi company after investing US$1 billion in a joint venture (JV) that had yielded nothing but burdened it with additional debt, 1MDB agreed to a call option to subscribe for an additional US$1.5 billion.

On March 31, 2010, 1MDB signed an agreement to convert its 40% stake in the JV to murabahah notes — in his witness statement, Shahrol said this was done as the JV was not performing to expectations — and at the same time, gave PSI a US$1.5 billion call option on 1MDB. (PSI did exercise the call option in 2010 and 2011, requesting drawdowns amounting to US$1.25 billion, but 1MDB only managed to oblige with US$830 million.)

According to Shahrol, he committed 1MDB to more debt in the belief that it was to Malaysia’s greater good.  “I felt I had no choice but to execute [it] as this is something important to the country.

“Then, I did not question as I looked at it as a bigger strategic arrangement between G and G (government and government). That is why I did not think that [having 1MDB fork out another US$1.5 billion] was an odd arrangement. Now seeing it, it doesn’t make sense.”

Shafee described the US$1.5 billion to PSI as either “an idiotic decision” or a decision by management to cheat 1MDB, resulting in the company being made to look like a fool.  Shahrol responded, “This is a statement from you (Shafee).”

It is worth noting that the murabahah scheme came after 70% of 1MDB’s initial US$1 billion investment in the JV was transferred to Good Star Ltd, a company controlled by businessman Low Taek Jho, who is alleged to have been in cahoots with former prime minister Datuk Seri Najib Razak to defraud 1MDB. Low is now in hiding.

When the transfer came to be known to 1MDB’s board of directors, Shahrol was instructed to recover the US$700 million from Good Star.

Shahrol maintained that he had brought the matter of the remittance to Najib’s attention, but that it had not been recorded in meeting minutes as this had been prepared by Low.

Shahrol: If it were up to me, I would have recorded [it], but this paper was prepared by Jho.

Shafee: Was Jho the CEO?

Shahrol: No.

Shafee: Was he the shadow CEO?

Shahrol: As the prosecution mentioned, he was the mirror image of the prime minister.

Shahrol also said Najib, who was then the chairman of 1MDB’s board of advisers, had remarked that a second valuation for the two oilfield-related assets that PSI was to inject into the JV was “not preferred”.

He based this on meeting minutes dated Oct 16, 2009, which stated that “the second valuation may prove to have more downside than upside to 1MDB”, but admitted that Najib never said it was not necessary.

In the end, 1MDB relied on the so-called independent valuation by Edward Morse, a PSI-appointed valuer, who based on PSI’s information, valued the assets at US$3.625 billion (even though it was eventually found that only a fraction of the assets belonged to PSI).

Hearing before High Court judge Collin Lawrence Sequerah continues on Monday.

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