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1MDB: Goldman Sachs faces suit over ties to Malaysian fund

Goldman Sachs has been sued by a shareholder of one of its former clients over alleged fraudulent misrepresentations that involve links to the prime minister of Malaysia.

Primus Pacific Partners, a private equity firm and the largest shareholder in Malaysian bank EON Capital, filed suit against Goldman for $510 million for fraud and breach of fiduciary duty, according to a statement released Tuesday.

The suit claimed that Goldman Sachs concealed a conflict of interest involving Malaysian Prime Minister Najib Razak while the investment bank was acting as financial adviser to EON, which was weighing a takeover bid by Hong Leong Bank. Talks on the deal reportedly began in 2009, but the bid was held up until 2011 as Primus fought the offer in Malaysia's courts.

One of the prime minister's brothers, Nazim Razak, was a director at Hong Leong Bank, while another brother, Nazir Razak, was chairman of CIMB Group, which advised Hong Leong Bank on the bid.

At the same time as it was advising EON, Goldman was an adviser to 1Malaysia Development Berhad, also known as 1MDB, a development fund established by the prime minister, the lawsuit noted.

Primus claimed that Goldman first called the Hong Leong bid "unfair," only to reverse course weeks later. According to the suit, the final price of the merger was "hundreds of millions of dollars below fair value," but the reversal may have furthered Goldman's role as adviser to 1MDB. The original complaint can be read here.

In a statement in response to the suit, Goldman Sachs pointed out that Primus had already failed to block the deal.

"This plaintiff previously lost its challenge in the Malaysian courts seeking to stop a transaction involving a Malaysian company, which was then approved by shareholders," the investment bank said. "We will vigorously contest this misguided additional lawsuit in New York court."

After the court decision in 2011, Dow Jones reported that Primus faced a "significant loss on its investment" in EON if the takeover by Hong Leong Bank took place.

The office of Malaysia's prime minister and 1MDB did not immediately respond to emailed requests for comment.

The suit comes as 1MDB faces international regulatory scrutiny over accusations that its funds were misappropriated. U.S. prosecutors sued last week to seize more than $1 billion in assets they said were tied to a scheme to launder money stolen from the fund.

Questions about movement of funds from 1MDB gained attention about a year ago, when The Wall Street Journal reported that in 2013 nearly $700 million had flowed from the fund to Malaysian Prime Minister Najib Razak's personal bank account.

Najib has repeatedly denied wrongdoing and, under pressure from the outcry caused by the WSJ report, said the funds were not from 1MDB but were a private donation from a Middle Eastern country he declined to name. He has denied benefiting personally from the funds.

—CNBC's Kate Kelly contributed to this report.