Tuesday, Jun 19, 2018
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Solar panel maker Xunlight facing lawsuit

Investor claims CEO defrauded company’s backers

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    The lawsuit against Xunming Deng, president and CEO of Xunlight, states he defrauded investors for his own benefit.

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A Toledo solar-panel manufacturer has been sued by one of its investors, claiming that the company’s founder defrauded investors for his own benefit.

The lawsuit deals with Xunlight, the flexible solar-panel manufacturer, and several related companies. The fight is primarily between Xunming Deng, the company’s founder and former chief executive officer, and Bo Lee, a Colorado-based investor in a related company and the man in charge of developing Chinese investors for Xunlight. But the deal in dispute could have consequences for the University of Toledo, as UT-affiliated entities had invested in the company.

The lawsuit, filed last month in U.S. District Court, claims Mr. Deng defrauded investors when he negotiated a financial restructuring and sale of some assets to his own benefit and to the detriment of one of the companies.

Mr. Deng claims the deals were approved by the companies’ board of directors and investors, and that Mr. Lee is a disgruntled investor who would have let Xunlight go bankrupt. “All his allegations are false,” Mr. Deng said.

Midwest Optoelectronics is a holding company founded by Mr. Deng and his wife, Lieu Xu; the pair are majority owners of the company and are two of its three board members. Its main asset had been a 51 percent stake in Xunlight. Mr. Deng was the chief executive officer and board chairman of Xunlight until March, 2012.

The company was licensed by the University of Toledo with technology being developed by Mr. Deng as a professor at UT. The company then sublicensed the technology to Xunlight, the lawsuit states.

Mr. Lee invested $400,000 in MWOE, and has an ownership stake of less than 1 percent.

The dispute stems from the near bankruptcy of Xunlight in 2012 and steps the company took to reorganize and generate new investments to keep the company afloat.

Starting in 2011, according to the lawsuit, Xunlight began negotiations with MWOE to reduce its ownership stake in Xunlight in exchange for a cash infusion by investors. Xunlight investors agreed to stave off bankruptcy for the company if they received a larger ownership share in the company. Xunlight also planned to divest itself of its Asian operations that were in China.

Xunlight Asia, Mr. Lee claims, was supposed to be sold to Midwest as part of its compensation for reducing its ownership stake in Xunlight. Most of that was in the form of 736,471 units of ST&I MWOE Holding Inc. stock, valued at $4.7 million. That was ultimately devalued to about $100,000 with a $4.6 million write-down.

At the time of the negotiations, Mr. Deng was chairman and CEO of MWOE and Xunlight Asia, and was thus in a position to influence the negotiations, according to the lawsuit.

In the end, Mr. Lee claims, Xunlight did not sell its Asian operations to MWOE, but instead sold it at a lower price to XL Technology Holdings, a British Virgin Islands company Mr. Deng owned. Meanwhile, MWOE reduced its ownership stake in Xunlight from 51 percent to less than 7 percent.

“Instead of Midwest purchasing Xunlight Asia as continuously represented by Deng, in the eleventh hour and without the knowledge of Bo Lee or other members of Midwest, Xunlight Asia was actually purchased for only one million dollars ($1,000,000.00) by a company wholly owned and controlled by Defendants Deng and Xu,” the lawsuit states.

Mr. Deng claims that MWOE’s board rejected a purchase of Xunlight Asia because it did not want to take on liabilities associated with working in China.

According to documents Mr. Deng provided to The Blade, MWOE original investors included Rocket Ventures Fund, the University of Toledo Foundation, a holding company affiliated with the University of Toledo Innovation Enterprises, and Bob Savage, Jr., of Rocket Ventures, among others.

UT officials have said a little more than $5 million of equity was transferred to UTIE from the University of Toledo Foundation in 2008. Most of that was in the form of 736,471 units of ST&I MWOE Holding Inc. stock, valued at $4.7 million. That was ultimately devalued to about $100,000 with a $4.6 million write down.

It’s unclear if the devaluation of UTIE’s holdings with MWOE was because of the restructuring at issue in the suit, or Xunlight’s reduced market value.

“We were certainly disappointed with the market’s devaluation of the MWOE equity in UTIE’s portfolio, however we believe it to be a function of the market behavior prevalent in the solar energy industry during the past several years,” UTIE interim CEO Rhonda Wingfield said in a statement. “We are hopeful MWOE and Xunlight can resolve their disagreement, but due to UT’s and UTIE’s relationship with both companies, we will defer further comment on this issue to them.”

Mr. Lee also claims a consulting contract he had with Midwest was a sham to cover up mistaken valuation of the company.

When Mr. Lee invested in the company, it was based on a valuation of $65 million. He claims ownership units he was issued were based on a company valuation of $100 million, “shorting Lee approximately 15,000 membership units.”

Mr. Lee alleges Mr. Deng said he had to “cover up this mistake” so that other investors would not know they were entitled to more membership units. Mr. Deng created a consulting arrangement for Mr. Lee that would compensate him for the error, though Mr. Lee would not actually do any work for the company, the lawsuit states.

Mr. Deng says that accusation is false.

“He went with me on many trips to China to look for money for Xunlight corporation,” he said. “He sent me invoices for his work, and we paid him.”

Mr. Deng, Ms. Xu, and MWOE claim Mr. Lee breached his contract with MWOE by leaking confidential information to prospective investors. They are arbitrating their claims.

That arbitration document alleges that Mr. Lee had hired a media relations firm to publicize his claims.

Mr. Lee’s suit also claims Midwest had invested in the development of hydrogen energy technology, and received a U.S. Department of Defense contract. In 2013, Mr. Deng stopped pursuing the technology for Midwest; Mr. Lee claims Mr. Deng may be developing the technology outside of Midwest for his own benefit.

Contact Nolan Rosenkrans at: nrosenkrans@theblade.com or 419-724-6086, or on Twitter @NolanRosenkrans.

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