Suntech fraud investigation prompts class action lawsuits; claims of forewarnings

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On July 30, Suntech announced it had launched an investigation into the possibility that a security interest it received in May 2010 in connection to its Global Solar Fund, S.C.A., Sicar (GSF) investment totaling €560 million, was fraudulent.

On the back of the news, the Chinese crystalline photovoltaic module manufacturer’s stock plummeted – reportedly by 15.3 percent on Monday, July 30, and 20 percent, to $1.08 on the Tuesday, according to Forbes – leading to investor losses. As such, both the Rosen Law Firm and Glancy Binkow & Goldberg LLP have launched class action lawsuits alleging that Suntech "lacked internal and financial controls", meaning its financial statements "were materially false and misleading at all relevant times."

In what will be seen as a further blow, Reuters has today, August 6, published an article claiming that it has seen an email in which Sino-Italian private equity firm Mandarin Capital Partners warned the CDB not to invest in solar projects in southern Italy "partly because fraudsters in the booming renewable energy industry there had become a major risk". Reportedly, Mandarin Capital Partners was invited by the CDB to co-invest in the GSF.

Mandarin Capital said it declined to invest and even wrote to the CDB warning it not to support the GSF’s Italian projects. "GSF smacked of a scam," Alberto Forchielli, managing partner of Mandarin Capital, told Reuters. "But CDB didn’t listen to me." The news agency added that it is unclear whether Suntech was advised of the warnings or not. And despite the advice, the CDB decided to make €554 million available to Solar Puglia II, one of the GSF’s investee firms.

According to the New York Times (NYT), Suntech is the largest investor in GSF, with an 80 percent stake. Meanwhile, Suntech founder and CEO, Zhengrong Shi, and Javier Romero, a former Suntech sales representative, through his firm, GSF Capital Pte Ltd, each own 10 percent.

Reuters further reported that Romero’s firm, from which Suntech received the German government bonds, was not actually the owner of the bonds. Rather, they were said to have been "borrowed" from an unnamed European company. "Suntech has not disclosed the name of the fictitious bonds’ original owner, nor said why it relied on Romero for this sum of paper and not the GSF fund’s own assets," wrote the news source.

Speaking to pv magazine, Renewable Analytics analyst, Dirk Morbitzer said that the bank lenders could now demand other securities. However, he added that with Suntech’s cash flow this could be difficult. "When Suntech cannot successfully sell GSF, then the repayment of the bonds in the spring of 2013 would be at risk," he stated, adding, "Should the CDB in the short-term not demand other securities, then this is again a sign for hidden subsidies. It is hard to imagine that a European bank would not require any other security."

When he asked Suntech in which courts their complaints had been filed, he was told that they did not want to disclose this information – "a strange reaction in my opinion," he said. "If the lawsuits are already filed, they should be on public record." Suntech also declined to reveal this information to pv magazine.

However, Suntech’s Björn Emde did tell pv magazine, "Suntech and Dr Shi hold shares in this fund, which had built solar parks in Italy and Spain. It was an investment in good times, but now we need the money for the core business. [The issue] came to light as we came to sell GSF. The disadvantage is that it delays the sale and we need the revenues to pay back next year a convertible bond."

This issue of repayment was highlighted by the NYT, which stated that analysts currently place Suntech’s debt at $2.3 billion. It added that the manufacturer – the largest of its kind in the world – has to pay back $540 million in debt in 2013. "If it had to make good on all of the loan guarantees, it would owe nearly $680 million more," it said.

As Raymond James analyst, Pavel Molchanov told the newspaper, "If this was an American company, there is little doubt in my mind that it would be the next Solyndra — in other words, just a bankruptcy waiting to happen."