BRINDISI, Italy (Reuters) - An Italian court has filed criminal charges against an investment fund controlled by China's Suntech Power Holdings, the world's largest maker of solar panels, accusing it of illegally building solar farms to milk state subsidies.
The charges, together with other legal actions still being prepared against the fund, could eventually result in 80 million euros' worth of subsidy-backed solar farms being dismantled, an Italian prosecutor said, extending the problems of Suntech's Global Solar Fund GSF.L, which invests in European solar power projects.
The charges and pending litigation have not been disclosed by U.S.-listed Suntech STP.N, whose problems in Italy appear to go well beyond the limited statements it has so far made in official filings.
Suntech has lost more than 40 percent of its market value since July 30, and is being sued by several U.S. law firms on behalf of shareholders, after revealing that a GSF shareholder and executive, Javier Romero, had used $700 million (442 million pounds) in fake German bonds to help guarantee some of the fund's financing.
The class-action lawsuits say Suntech, which owns 80 percent of the fund, failed to properly disclose the financial workings of GSF and to monitor its business practices.
The Italian charges add to questions over the Luxembourg-based fund's affairs, the extent to which Suntech supervised it, and how much shareholders were told about the scale of its troubles in Italy.
Suntech is also scrambling to find new financing to cover a convertible bond due early next year at a time when the entire solar industry is in the middle of a slump.
"Suntech management had the opportunity to disclose all potential problems associated with GSF when they announced the suspected fraud with the German bonds," said Mark Bachman, a solar technologies analyst for Avian Securities in Boston.
"If there are now additional potential liabilities related to GSF activities in Italy that were undisclosed, then what little investor interest remained in the stock will be eroded."
A prosecutor in the southern Italian city of Brindisi has formally charged five of the fund's subsidiaries with illegal construction of solar power plants, accusing them of sidestepping the approval process in order to exploit Italy's generous renewable-energy subsidies.
The charges are that GSF subsidiaries failed to obtain the correct permit to build solar plants of more than 1 MW by splitting each park up into several smaller units that qualified for a less rigorous and faster permitting process.
In some cases, the GSF subsidiaries prematurely announced completion of construction on the plants in order to meet a deadline needed to qualify for incentives, court documents show.
The trial involving these five solar plants is set to begin on December 6.
Another 11 of the companies controlled by the fund are under investigation, and charges will be sought against them, said Nicolangelo Ghizzardi, the prosecutor handling the cases.
Suntech's chief technology officer, Stuart Wenham, who was appointed by Suntech to help oversee the work of the fund, declined to comment for this story and referred questions to Suntech's executive chairman, Zhengrong Shi, who also has an individual 10.7 percent stake in the Global Solar Fund.
Shi's office said he was travelling and could not immediately respond to emailed questions. He said in a statement on August 14 that "the solar plants owned and operated by the fund's operating companies are in good order".
In reply to questions for this story, Suntech said it was reviewing the GSF portfolio and that it expected a "positive outcome" from the proceedings, and GSF denied any wrongdoing.
Together, the charges and investigations apply to solar plants that produce more than 20 MW of power and cost at least 80 million euros (63 million pounds) to build, according to an estimate by an engineer consulted by the court.
"If convicted, the demolition order is obligatory and issued automatically by the judge," Ghizzardi said in his office in Brindisi, a city in the sundrenched Puglia region at the "heel" of Italy.
The number of GSF-owned companies that are already charged or under investigation could rise, said a Puglia judicial source who spoke on condition of anonymity because the probes are still protected by confidentiality rules.
Suntech's only filing on the issue was in May last year, when it noted in its 2010 annual report that solar parks belonging to five of the fund's investee companies and totalling 2.83 MW were under investigation by the court of Brindisi.
In Suntech's 2011 annual report, filed in April this year, the firm gave no update on the situation, though Ghizzardi had already asked for a trial by the end of February. On June 26, a judge confirmed the charges and ordered the trial to begin in December.
In a May 2011 disclosure, the firm said a "negative sentence" relating to the 2.83 MW would cost it about 9.6 million euros. Using the same valuation basis, an adverse finding on 20 MW of solar capacity would cost around 68 million euros.
A Suntech spokesman said the company had been assured that GSF "acted in compliance with the local regulations, that it has received legal advice on this matter, and that it expects a positive outcome from the proceedings".
GSF said it had acted within the law, and that the fund "did not develop any project", Alberto Aragones, who is described as GSF's legal representative for its Italian units, said in written answers.
"GSF Sicar bought the projects, from third-party developers, once they were 'fully authorised'," Aragones said.
Aragones was also investment director for GSF Capital Pte Ltd, which owns 10 percent of the Global Solar Fund and is controlled by Romero.
In September 2011, GSF suspended further investments in Italy "until the situation is clarified" after the Brindisi court had seized the plants that were the focus of investigation, according to a statement sent to Italian news organisations 11 months ago.
Asked if Suntech knew about GSF's legal troubles, Aragones replied: "Any relevant information has always been included at least in GSF Sicar audited financial statements."
FRAUD STILL A MYSTERY
Romero has emerged as the central figure in the fund's descent into legal controversy, having been blamed by Suntech for providing the company with the 560 million euros in apparently fake collateral for a loan made to the fund.
Romero did not comment after repeated requests through Italian lawyers who have represented him. Through public relations firm Allea, Romero denied any wrongdoing earlier this month.
He had been legal administrator for many of the companies being pursued by Italian prosecutors until last year.
GSF said Romero had been responsible for the fund's Italian investment strategy, and that his strategy "has always been validated" by the GSF board, "top level consultants" and Chinese and European lenders to the fund.
Romero's private firm, GSF Capital, pledged the bonds to Suntech so that the Chinese company could use them as part of its efforts to help secure bank funding for one of the fund's investee firms, Solar Puglia II.
Solar Puglia II - through its own subsidiaries Energetica Wing II, Solar Puglia and Energetica Wing - owns the firms charged with illegal construction of solar power plants in Italy, court documents show.
Ghizzardi said his investigations had not found any evidence related to the suspected bond fraud.
Abuse of the approvals process has been widespread in Puglia, where fields of lucrative black solar panels replaced traditional crops of olives and grapes, and most of the cases were not prosecuted, Ghizzardi and Italian energy experts said.
Large, multi-megawatt projects were artificially split into single-megawatt projects, each small enough to be approved within 30 days without much scrutiny under a permitting process designed for small solar farms of less than 1 MW, they said.
In reality, though, the fast-track approvals were used to assemble larger, multi-megawatt projects to give the fund access to Europe's richest renewable incentives, they said.
Under incentives only recently wound back by a cash-strapped Rome, developers were given guarantees by the state to sell their electricity at above-market prices for 20 years. (Additional reporting by Samuel Shen and David Lin in Shanghai, and Mark Bendeich in Sydney; Editing by Will Waterman)