Oh, the irony. A Chinese company is accusing someone else of fraud that could potentially lead to the company's financial ruin. What could be more fitting? If you remember last year, Chinese frauds -- or, at least, alleged frauds -- including China MediaExpress, Puda Coal, Longtop Financial, and others delayed SEC filings, causing investors to question every financial statement that came out of China. Today, you may appreciate the irony in Chinese solar manufacturer Suntech Power's (NYSE: STP) claim that it may be the victim of fraud perpetrated in Europe.

The issues go back to a company called Global Solar Fund S.C.A., an investment company with 145 MW of capacity in Italy that is 80% owned by Suntech and 10% owned by the company's CEO. In 2008, the company took an 80% stake in the fund for $318 million. When the financial crisis hit, credit dried up, and Suntech guaranteed a $683 million credit line for the company's portfolio. GSF then pledged $690 million in German government bonds as collateral.

The problem is that it appears the government bonds never existed, and now Suntech may be on the hook for the guarantee.

This comes at a time when Suntech not only has $2.3 billion in debt, but also has $3.1 billion in current liabilities and notes coming due next year. Executives were trying to sell some or all of the GSF investment to pay for these obligations, and they discovered that the bonds may not have ever existed as part of their due diligence.

Suntech has said it may delay second-quarter earnings as a result (always a bad sign), and the company will likely have to lean on Chinese lenders for backing -- if it can even get that.

Debt kills
Suntech has always been near the top of my list of potential solar disasters. In October of last year I called it the second-worst stock among solar's impending failures. There's no way we could have foreseen this turn of events, but when companies -- especially Chinese companies -- rely on billions of dollars of short-term debt, the outcomes can be disastrous.

Yingli Green Energy (NYSE: YGE) and LDK Solar (NYSE: LDK) are also sitting on massive debt loads and have similar risks to Suntech when it comes to financing. If Suntech is the first domino to fall in China, it would be a shocking revelation for the industry.

Turning the industry on its head
What will be fascinating to watch is how the industry responds to Suntech's trouble. Suntech has long prided itself on being the largest producer of solar modules in the world, but financial trouble could send installers to competitors. For one thing, installers will look to balance sheets and financial trouble as a sign that warranties aren't worth the paper they're printed on. Insurance companies will back away from the company's modules, and sales could suffer dramatically as a result.

This could start something of a death spiral for a company that was once among the great hopes for some solar investors.

Lessons learned
Solar is a risky business right now, and Chinese firms pose risks I wouldn't want to be a part of. Not only did Trina Solar reduce second-quarter guidance yesterday, but Canadian Solar (Nasdaq: CSIQ) reduced guidance this morning, and Suntech dropped this bombshell. We won't know the exact impact of this potential fraud or what the numbers are for at least a few weeks, but it's ironic that a Chinese company is complaining of fraud such a short time after Chinese companies defrauded so many investors.

Spillover effect in the U.S.
We'll see tomorrow whether the bad quarter has spilled over to U.S. solar companies. First Solar (Nasdaq: FSLR) will report earnings, and considering that the company delayed closing its German plant, I don't expect the numbers to be as bad as they are in China right now.

First Solar has had a rough go of it over the past two years, but we should be able to trust the numbers the company reports, and it's sitting on a much stronger balance sheet than most Chinese rivals. These are just two reasons First Solar might be a decent buy in solar -- and they only scratch the surface of our detailed report on the company. Find out how big the company's opportunity is and the three areas you have to watch closely when you read the report for yourself by clicking here.