Chinese Solar PV Manufacturers: Wall St. ‘Pump & Dump’ Leaves US Investors Holding the Bag

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This photo of Grand Cayman is courtesy of TripAdvisor

• On Dec. 21, 2007, the ADRs (American Depositary Receipts) of Chinese solar PV manufacturer Suntech Power Holdings Co. traded at $85.16. They’re price as of close of trading Dec. 9: $2.72 a share.
• On Sept. 28, 2007, Chinese solar PV manufacturer LDK’s ADRs hit a high of $68.90. Closing price on Dec. 9: $4.55
• On April 18, 2008, the ADRs of JA Solar Holdings traded at $25.75. On Dec. 9, they closed at $1.62.

The list goes on. In the mid-2000s, US investment banks embarked on schemes with fledgling Chinese solar PV manufacturers that ushered their shares on to US stock exchanges and into the portfolios of US investors.

Getting there involved some creative, but well-worn and lucrative legal footsteps, including establishing off-shore holding companies in tax havens such as the Cayman Islands, where the solar PV manufacturers are insulated from having to comply with the normal, standard financial accounting and disclosure rules required for companies listed on US stock exchanges. It’s a bit of financial market forensics that the Pittsburgh Tribune’s Lou Kilzer maps out on TribLive.

In a classic boom-and-bust cycle, solar PV panel prices have plummeted some 40% in the past year. Having borrowed hugely thanks to Chinese government largesse, US investors have helped fuel the rapid expansion of China’s solar PV manufacturers by buying up their US exchange-listed American Depositary Receipts (ADRs).

With their profit margins squeezed to the bone, Chinese solar PV manufacturers – like their US and European counterparts – are now suffering the consequences of unrestrained borrowing and investment in capacity expansion. Industry analysts anticipate a much less populated Chinese solar PV manufacturing sector in the near future.

Speculative Solar Bubble

Along with centrally controlled and coordinated Chinese government subsidization of solar PV manufacturers, raising equity capital via US stock exchanges has been one of the key elements that’s led to a dramatic, 40% fall in the price of solar PV panels, not only in the US, but worldwide. The rapid increase in production of solar-grade polysilicon – the raw material for fabricating solar PV cells – has been another.

Consumers have been the beneficiaries, at least over the short-term. Solar PV manufacturers in the US, Europe and elsewhere are pressured and threatened enough to have filed a dumping complaint that’s making its way through the US International Trade Commission (ITC) and Commerce Dept.’s review process. As for those who have invested in the ADRs of Chinese solar PV companies, well, they’re not so happy either.

As Kilzer reports, the initial investor euphoria over US exchange-listed Chinese solar PV manufacturers has given way to consternation and anger, as well as some lawsuits. Washington DC attorney Herbert Milstein filed a class-action lawsuit against LDK Solar after a company insider blew the whistle on possible fraudulent accounting practices.

Fueling LDK’s rapid rise to becoming one of the world’s largest solar PV manufacturers were billions of dollars in Chinese government subsidies and equity capital raised from investors in its US exchange-listed ADRs. Today, LDK’s on the verge of bankruptcy.

Investors Left Holding the Bag

As it stands, there’s not much hope for US investors who’ve bought shares in these companies, even if fraud, other financial crimes or regulatory violations occurred. “If you’re trying to get at assets that are in China, you’re going to be screwed,” Thomas Shoesmith, a Silicon Valley attorney who establishes Cayman Island companies, told Kilzer. “Any court decision in the U.S. is not enforceable in China.”

In his class-action lawsuit, Milstein represented 2,409 claimants who lost more than $300 million almost overnight as a result of the possible fraudulent accounting becoming public. The out-of-court settlement totaled $16 million, $6 million of which was paid by an insurance company, Kilzer reports.

“Everything old is new again,” the saying goes. Some of the biggest investment booms and busts in world financial history have come about as a result of the fascination of investors in comparatively capital-rich countries with investing overseas. European and US investors have a long history of latching on to overseas investment themes, and sharp operators at US investment banks have gladly taken advantage of that. They profited greatly from paving the way for China’s PV manufacturers to raise capital through US stock exchanges.

US investors are now left holding the bag, but they and their attorneys are calling for the SEC to close the loophole that’s allowed this latest Wall Street concocted speculative boom and bust to occur in the first place.

At the Milstein-led lawsuit’s settlement conference in June, 2010, U.S. Northern District of California Judge William Alsup called the path to US stock exchange listing Wall St. investment banks led Chinese solar PV manufacturers “a giant loophole,” according to Kilzer’s report.

“(The) SEC ought to say that if somebody is not going to make their work papers available, they cannot trade on the national exchanges,” Alsup was quoted as saying.