Given the hedge fund theme today, it seems appropriate to note that the Russian state oil company Rosneft (previous posts here in connection with the Yukos chapter 11 case) is proceeding with its huge $10 billion initial public offering on the London Stock Exchange. As this NZ Herald op-ed notes, participation in the Rosneft IPO is not recommended for the faint-hearted and, as this Financial Times ($) article reports, the company’s prospectus includes 25 pages of risk factors that certainly could not be construed as underplaying the risk of investing in the IPO:

Rosneft yesterday began selling itself to investors, warning of “material weaknesses” in its internal controls, a Kremlin-controlled board that might not always act in the interests of minority shareholders and possible legal liabilities of at least $14.7bn (£8bn).
The state-owned Russian oil giant published the preliminary prospectus for its float in London and Moscow next month. It hopes to raise $10bn-$11.7bn, making it one of the world’s largest initial public offerings and valuing the company at up to $80bn.
Over 25 pages, the potential pitfalls are set out. As expected, the central threat to any investment lies in the legal challenges surrounding Rosneft’s contentious acquisition of the former assets of Yukos, the oil company once owned by the now imprisoned oligarch Mikhail Khordokhovsky. Rosneft acquired Yuganskneftegaz, the main asset, in an opaque and forced auction.

The prospectus says that Rosneft is a defendant or respondent in four cases brought by Yukos or its shareholders that could result in damages of at least $14.7bn. Rosneft is “actively contesting” the claims and suing Yukos in Moscow for more than $17bn.
It adds: “If certain shareholders of Yukos are successful in obtaining an arbitral award against the Russian Federation, those shareholders may seek to enforce that award against Rosneft which may expose Rosneft to substantial liability.”
Rosneft’s corporate governance might also prove offputting. The prospectus says the Russian government indirectly owns 100 per cent of Rosneft and that six members of the nine-member board are officials in the government. This means Rosneft may “engage in business practices that do not maximise shareholder value” and cause it to “take actions that may not coincide with the interests of minority share-holders”.
Its accounting systems may not be as sophisticated as that of companies with a longer history of compliance with US accounting rules and “Rosneft’s independent auditor has identified certain material weaknesses in Rosneft’s internal controls”.
Rosneft might also have trouble financing its capital expenditures. It is relatively highly leveraged and must observe certain financial and other restrictive covenants under the terms of its indebtedness. The document notes that “crime and corruption could create a difficult business climate in Russia”. . . .

So, if you’re looking for an investment in a company that lacks internal controls, has a board that often does not maximize shareholder value, may lose its shirt in pending litigation, may have trouble financing its capital expenditures and treads in markets that are rife with crime and corruption, then this one’s for you!