June 2 (Bloomberg) -- First Solar Inc.'s second-largest shareholder sold half his shares, a signal that the world's biggest solar company may soon fizzle.

Chief Executive Officer Michael Ahearn reduced his stake to 3.07 million shares as of May 16 from 6.1 million shares at the company's initial offering in November 2006. The latest disposals brought in $257 million since Feb. 19, according to company filings with the Securities and Exchange Commission.

``That's a remarkable withdrawal for a CEO and I wouldn't want to see him sell off much more,'' said Robert Lutts, who manages more than $500 million as chief investment officer at Cabot Money Management, including 18,953 shares of First Solar. ``He's taken enough out to change his lifestyle.''

The sales came as the Phoenix-based company told investors in a regulatory filing that its cells made of toxic cadmium- telluride may be banned in the European Union, its biggest market. Declining subsidies risk hurting sales, while metal costs are rising and solar-panel prices are slipping.

Ahearn, 51, became CEO in 2000 after working four years at billionaire John Walton's venture capital firm, True North Partners, the solar company's initial backer. John Walton's estate and siblings, heirs to the Wal-Mart Stores Inc. fortune, are the biggest First Solar investors, holding 44 percent. Ahearn is a lawyer by training who is running his first public company.

The CEO, who retains a 3.85 percent stake worth $822 million, declined through a spokeswoman, Barbara Kates-Garnick, to be interviewed. Jim Walton, John's brother and an executor of his estate, also declined to be interviewed.

First Solar shares fell $11.58, or 4.3 percent, to $255.96 in Nasdaq Stock Market composite trading.

Market Value

The stock climbed 15-fold from the offer price of $20, propelled by the frenzy for clean energy investments, to a record $311.14 on May 1. At its current price, First Solar has a market value of $20.4 billion, more than twice that of General Motors Corp., the world's largest carmaker. Its price-earnings ratio is 134.7 compared with an average of 23.2 for the companies in the Standard & Poor's 500 Index.

First Solar rose ninefold last year, outpacing Suntech Power Holdings Co. of Jiangsu, China, which more than doubled, and San Jose, California-based SunPower Corp., which more than tripled, in New York trading.

First Solar says its design is the cheapest in the industry, with production costs as low as $1.14 per watt, one-fourth the expense of most competing silicon-based systems.

Cadmium Risk

Its technology applies cadmium-telluride to glass in a patented process that converts sunlight into electricity without costly processed silicon. Spot prices for polysilicon doubled to $500 per kilogram this year, Suntech Chief Executive Officer Zhengrong Shi said on a conference call.

Cadmium, a toxic metal according to the U.S. Labor Department, has been linked to breathing and kidney disorders. It's banned from use in batteries and related electronics in the European Union, where First Solar gets more than 90 percent of its sales.

An expansion of EU restrictions to solar cells would make the company's current technology ``impractical,'' First Solar said in a Feb. 21 Securities and Exchange Commission filing.

Competitors are making thin-film modules similar to First Solar's and using less toxic substances. DayStar Technologies Inc. of Grass Valley, California, uses a copper-indium-gallium- selenide compound that doesn't pose cadmium's risks, said Stephan DeLuca, the company's CEO.

``The concerns about cadmium are real,'' DeLuca said. ``Where do you put it at the end of the life cycle?''

DuPont Award

DuPont Co. two months ago was ordered by a jury to pay $129.6 million to monitor the health of West Virginia residents affected by a 60-acre pile of waste that included cadmium, arsenic and other toxic metals, on top of a related $251.7 million punitive damages award.

``That's some pretty nasty stuff that they're going to have to find a place to put some day,'' said Kevin Landis, chief investment officer at Firsthand Capital Management Inc. in San Francisco, who oversees $750 million including shares of Suntech and Akeena Solar Inc. He's avoided First Solar.

Demand for First Solar's panels has outpaced production, and the company has sold 80 percent of its planned output this year. And short-sellers, who borrow shares and sell them in a plan to buy them back later at a lower price, have been burned by First Solar before. Short interest reached a peak on June 15 last year when the stock was $78.10 a share.

Tellurium Rare

Cadmium isn't the only risk inherent in their technology, said Paul Clegg, a solar analyst at Jeffries & Co. in New York.

``Tellurium, that's extremely rare and could hurt their expansion plans,'' Clegg said.

Tellurium is produced mostly as a byproduct of refining copper, and only one company collects it in the U.S., according to the U.S. Geological Survey. The price jumped eightfold in four years to $80 a kilogram (2.2 pounds) last year, largely because of demand from the solar industry.

Ahearn said in May 2005 the panels are safe, and that the process removes the substance from the environment. The company promises to dispose of the material at the end of a solar system's useful life, estimated at 25 years. As of March 31, First Solar said it accrued $18.1 million in collection and recycling liabilities.

Lutts, the Cabot money manager, plans to hold his shares.

``First Solar is the leader in this industry and I'm not going to miss this growth story like I did with Microsoft,'' Lutts said. ``Despite some short-term negatives, First Solar has a huge advantage over other producers and I view them as a long- term buy.''

To contact the reporter on this story: Christopher Martin in New York at cmartin11@bloomberg.net.

Last Updated: June 2, 2008 16:31 EDT