UPDATE 2-Chu to defend Solyndra loan to U.S. House panel

* Chu says department did due diligence on loan

* Democrats get outside opinion on restructuring

* New question raised about fraud allegation

* Private investors wavered on new deal - Republicans (Adds more Chu remarks)

By Roberta Rampton

WASHINGTON, Nov 16 (Reuters) - The U.S. Energy Department did its homework on a $535 million loan guarantee it gave to now-bankrupt solar panel maker Solyndra, Energy Secretary Steven Chu plans to tell lawmakers at a hearing on Thursday.

Republicans are expected to grill Chu on taxpayer-funded aid to Solyndra, brandishing e-mails from government officials and investors that they say show the loan was rushed, poorly supervised and ill-advisedly restructured.

Chu's prepared remarks for the House of Representatives Energy and Commerce committee show he plans to stand firm on the Obama administration's strategy of investing in clean energy.

"The loan guarantee to Solyndra was subject to proper, rigorous scrutiny and healthy debate during every phase of the process," according to his testimony.

"When it comes to the clean energy race, America faces a simple choice: compete or accept defeat. I believe we can and must compete," Chu said, urging Congress to continue to finance renewable energy projects.

In his remarks, he took ownership of final decisions on the aid to Solyndra and denied deciding anything about the loan guarantee "based on political considerations."

Investigators have gathered more than 250,000 pages of documents about Solyndra and conducted hours of interviews over the past nine months. Chu is the most senior government official to appear before the House committee.

Democratic lawmakers plan to knock down the Republican arguments, according to a staff memo released on Wednesday that includes a third-party legal opinion confirming the loan restructuring was permissible.

The opinion was prepared by Mary Anne Sullivan of the law firm Hogan Lovells, who was the Energy Department's general counsel during the Clinton administration.

FRAUD ALLEGATIONS

Lawmakers have complained Solyndra talked of rosy financial forecasts just before it ran out of cash. The FBI raided Solyndra's offices after it filed for bankruptcy, although little is known about that probe.

Last week, the Energy Department gave lawmakers a copy of a letter from a supplier who said Solyndra had sought to postpone payments to show "a higher-than-actual cash position to the U.S. government," according to the Democratic staff memo.

The memo did not include a copy of the letter but Democrats said "questions may be raised" whether the Energy Department responded appropriately.

E-mails provided to Reuters show a loan program official referred the fraud complaint to Solyndra lawyer Ben Schwartz in March 2010, asking him to "just send us whatever you have from your end, and we'll put it in the file ... No further action required."

The department official did not follow up on that request for seven months, until the company was running out of cash and sought to restructure its loan, e-mails showed.

"I don't mean to be a pest but can you send us an e-mail indicating the result of your internal investigation of whether subsequent to Nov 2009, Solyndra withheld payment to suppliers to improve its cash position," the loan official asked.

Schwartz replied in a memo dated Nov. 4, 2010, saying Solyndra officials found no evidence to support the complaint. Schwartz argued that even if the allegations were true, "such actions would not constitute fraudulent activity."

POLITICAL INFLUENCE?

Republicans have raised questions about whether decisions were made to help George Kaiser, a major investor in Solyndra and a fundraiser for the successful presidential election campaign of Barack Obama, a Democrat, in 2008.

"I want to be clear: over the course of Solyndra's loan guarantee, I did not make any decision based on political considerations," Chu said in his prepared remarks.

Democratic lawmakers said key department officials were unaware of Kaiser's connections and noted David Frantz, the director of the loan program, told investigators he had never heard of Kaiser until media reports about Solyndra.

When Solyndra struggled with cash flow in October 2010 and Goldman Sachs failed to find new private funding to keep it going, Kaiser's advisers were unsure whether plowing in more money was a good idea, e-mails provided by Republicans showed.

Solyndra wanted to announce some layoffs on Oct. 28, 2010, but postponed the bad news until after the Nov. 2 congressional elections, according to e-mails from Argonaut Private Equity, which manages Kaiser's investments.

"The DOE has requested a delay until after the election (without mentioning the election)," unidentified Argonaut officials wrote in one of three e-mails about the delay.

A Department of Energy spokesman dismissed the allegation, saying documents it provided show "decisions about this loan were made on the merits."

In December 2010, the department suggested a restructuring plan that saw $75 million from Argonaut and another private investors ranked ahead of the government in the event of bankruptcy, the new e-mails showed.

"I struggle to recommend making the additional investment," Steve Mitchell, managing director of Argonaut, wrote to Kaiser, noting the deal would give Solyndra some time to see if it could improve sagging sales.

Chu said the plan gave taxpayers a chance to recover the loan, even though it meant some debt would be subordinated.

"The department faced a difficult decision: force the company into immediate bankruptcy or restructure the loan guarantee," he said.

When the company ran out of money again, the department looked at options for support but decided more help "was not in the taxpayer's best interests," Chu said. (Editing by John O'Callaghan)