SHANGHAI/MILAN Aug 6 A major lender to China's
Suntech Power Holdings, a solar panel maker which has been stung
by a $690 million fraud linked to its expansion in Italy,
financed the expansion despite warnings from a business ally to
avoid Italy's scam-ridden solar sector.
U.S.-listed Suntech, the world's largest supplier of
solar panels, has lost 40 percent of its market value since
revealing on July 30 that 560 million euros ($691 million) in
bonds involved in securing the bank financing may never have
Suntech has declined to discuss how the German government
bonds in its possession turned out to be apparent forgeries and
has hired lawyers to investigate one of the biggest suspected
frauds to hit a listed Chinese company.
Sino-Italian private equity firm Mandarin Capital Partners
said it wrote emails to the China Development Bank (CDB) as
early as three years ago, advising it not to get involved in
Suntech's target area of southern Italy, partly because
fraudsters in the booming renewable energy industry there had
become a major risk. Reuters has seen one of the emails.
Mandarin Capital said it was invited in 2009 by CDB, which
was also an investment partner of Mandarin Capital in other
ventures, to co-invest in Suntech's Global Solar Fund (GSF), an
investment vehicle spearheading the Italy expansion as a way of
creating demand for Suntech's panels.
Mandarin Capital said it turned down the approach and also
wrote to CDB, a major policy bank that lends at the behest of
China's government, advising it not to help finance the fund's
Italian projects because they were too large to be viable and
carried the added risk of possible encounters with criminals.
State-run CDB went ahead and lent 554 million euros to one
of the GSF fund's investee firms, Solar Puglia II. Puglia is a
southern Italian region where solar investment has boomed. It is
unclear if the bank passed on the warning to Suntech, or whether
CDB had been given contrary advice or had already been obliged
to make the loan before Mandarin's warning.
But the revelation raises questions over how the strong
advice of an experienced Italian investor went unheeded, and
also how Suntech could then fall victim to a fraud that lawyers
said would not have survived basic due diligence.
Suntech and CDB declined to comment for this article.
The Chinese bank's willingness to go ahead despite the risks
also underlines complaints by foreign competitors that easily
accessible and often-cheap state funding offers Chinese firms an
unfair advantage and can lead to weak corporate governance. The
terms of the CDB loan are not spelt out in Suntech filings.
"GSF smacked of a scam," said Alberto Forchielli, managing
partner of Mandarin Capital, a private equity fund set up in
2007 to mainly facilitate outbound Chinese investment. CDB is a
key investor in the Mandarin fund, along with Export-Import Bank
of China and Italian bank Intesa Sanpaolo. "Bu t CDB
didn't listen to me."
Forchielli said CDB had approached him to invest in the
fund, mostly for solar power plants in Puglia and Sicily. In an
email seen by Reuters and sent to a CDB official in June 2010,
he described Italy as a "solar bubble" and said Chinese
investors were not best placed to invest there.
"We got suspicious because it did mention a lot of important
corporate, banking, legal names associated to the project, a
tactic usually adopted by fraudsters in my experience," he said.
He added he also sought advice from the head of an
affiliated Italian firm, Cleantech S.r.l., before counselling
CDB against financing the Italian projects. Unlike Mandarin
Capital, Cleantech specialises in renewable energy and its chief
executive, Stefano Carpigiani, told Reuters he had confirmed to
Forchielli that the venture was unwise.
The suspected fraud revealed last week follows the discovery
of documentation "inconsistencies" with the German bonds, which
were held by Suntech as a hedge in case CDB ever called in
Suntech's commitment to guarantee the 554 million euro loan.
In a conference call on July 30, Suntech also accused the
GSF fund's outside manager, Spaniard Javier Romero, of possible
fraud, but it gave no evidence and did not take questions.
Suntech owns 80 percent of the fund and provides several
managers to oversee the work of Romero, whose own private firm,
GSF Capital Pte Ltd, holds 10 percent. Suntech Chairman
Zhengrong Shi, one of the Suntech managers who supervised the
work of Romero, also owns 10 percent. Shi declined at the July
30 Suntech briefing to answer any questions.
Romero could not be reached for comment, but Italian public
relations firm Allea, which represents GSF in Italy, emailed
what it said was a statement on his behalf denying wrongdoing.
"GSF Capital Pte Ltd and Mr Romero are investigating alleged
irregularities in relation to the bond pledge," it said. "They
deny any wrongdoings, will contest any proceedings against them,
and are confident they will be exonerated by the process."
Italy's solar market has become the world's second-biggest
after Germany, thanks to generous government incentives in place
since 2007, and it was the world's fastest growing in 2011.
Puglia, Sicily and other parts of southern Italy are blessed
with Mediterranean sunshine and cheap land, making them natural
destinations for solar power investors looking to profit from
the rich incentives for renewable energy.
The boom has led to a series of well-publicised arrests for
corruption and also asset seizures in recent years in southern
Italy, in both wind farms and solar power, as government
incentives are due to be scaled back. Italian crime-fighters
have also enlisted the help of anti-mafia investigators in
operations targeting the sector in the country's south.
This year, "Operazione Eclisse" ended in the seizure of 10
solar plants in Brindisi, a province in Puglia, after local
authorities became overwhelmed by fraudulent requests for
fast-track permit approvals - scams designed to get projects
approved quickly to take advantage of the incentives.
"The fraudulent procedure is the same - to split up
artificially a single plant to get round procedures envisaged by
the law," deputy prosecutor for the Brindisi area Nicolangelo
Ghizzardi said earlier this year on local Web TV TeleBrindisi.
There is no suggestion that organised crime was involved in
the suspected fraud on Suntech, though the company has given
only sketchy details of the transactions that led to it.
Suntech said it had obtained the German bonds from Romero's
private firm, GSF Capital. It said it needed the paper as
security because it had guaranteed CDB's loan to Solar Puglia
II. If the loan soured and Suntech was forced to pay up, Suntech
could do so by selling the bonds and using the proceeds.
But the bonds did not ultimately belong to Romero, according
to Suntech, which revealed on July 30 that Romero's firm had
actually borrowed the paper from another, 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.
It is also unclear what, if anything, Suntech paid Romero in
return for him pledging the bonds to Suntech, or how much
Romero's firm was paying the paper's mysterious European owner
for the right to hold them and pledge them to Suntech.
"We fail to understand why a European company would allow
GSF Capital to borrow 560 million euros in bond paper, as GSF
Capital's asset base is less than 10 percent of the value of the
bonds," Daiwa Securities analyst Pranab Kumar Sarmah said.
Another mystery is why it took Suntech two years after
guaranteeing the CDB loan to discover they may not exist.
Suntech said the bond certificates had been deposited in a
custodian bank and the fraud only came to light recently when
Suntech decided to sell out of the fund and its lawyers began
checking the fund's affairs.
"The company could have taken some pretty basic due
diligence steps to make sure the bonds are there," said Roger
Lui, a corporate lawyer at Allen & Overy in Hong Kong, who is
not involved in the Suntech case.