In Goldman Sachs’s Retreat From I.P.O., a Signal to Investors

When Goldman Sachs fires you as a client, you probably have a problem.

That appears to have happened last month, when Goldman withdrew as the lead underwriter for the initial public offering of the Russian cellphone operator MegaFon on the London Stock Exchange. The multibillion-dollar offering, the largest I.P.O. since Facebook, is nonetheless hurtling forward, highlighting a flawed system.

MegaFon is the second-largest mobile phone operator in Russia, with about 63 million customers, behind Mobile TeleSystems and ahead of Vimpelcom, both of which are listed on the New York Stock Exchange. MegaFon is controlled by one of Russia’s richest men, Alisher Usmanov, who is well connected with the Kremlin and has interests around the globe. (For one thing, he controls a roughly 29 percent stake in the London soccer team Arsenal.)

The I.P.O. is happening largely as a result of a battle for control between Mr. Usmanov and two other big shareholders, TeliaSonera, the Stockholm-based telecommunications giant, and Alfa-Bank, the large financial conglomerate controlled by another Russian billionaire, Mikhail Fridman. A settlement among the warring parties was reached in April, with Alfa selling its 25 percent interest in MegaFon for $5.2 billion to Mr. Usmanov and his associates and TeliaSonera shedding part of its stake.

The London offering is meant for TeliaSonera to sell down its stake to around 25 percent from 37.5 percent. Mr. Usmanov would then control 50 percent and one share of MegaFon. After the I.P.O., about 15 percent of the company’s shares will be held by the public.

The offering hit a road bump in October, when Goldman withdrew as the lead underwriter, giving up tens of millions of dollars in potential fees. The firm did not publicly disclose its reason, but a person close to the transaction said that Goldman withdrew because Mr. Usmanov wanted to place his controlling ownership in a holding company with his other investments, including his Arsenal stake and the ore mining company Metalloinvest.

The problem was that the holding company would be owned by Mr. Usmanov and Farhad Moshiri, who co-owns Usmanov’s Arsenal stake, and Vladimir Skoch, the father of Andrei Skoch, a prominent Russian oligarch and member of the Russian parliament who also owns part of Metalloinvest. Goldman felt that it did not have enough time to scrutinize the structure, and so it withdrew, according to this person, who spoke on condition of anonymity.

From the beginning of the I.P.O. process, there had been worries that a publicly held MegaFon would be controlled by elements other than Mr. Usmanov. This concern is typical in Russia, because the country has a weak rule of law, share ownership is murky and controlling shareholders have not been shy about leveraging their political power to shove out pesky minority owners. Mr. Usmanov is a reflection of this world.

An extremely successful businessman, Mr. Usmanov was imprisoned in Uzbekistan for six years after being convicted on charges of corruption in the 1980s. Mr. Usmanov strongly contends that the charges and imprisonment were trumped up and politically motivated. And false imprisonment was certainly something that happened during Soviet rule.(A Soviet court expunged his criminal record in 1989. The Supreme Court of Uzbekistan overturned the original conviction in 2000.)

But the new structure and the uncertainty about doing business in Russia, and the always looming issue of political involvement, may well have persuaded Goldman to withdraw.

When asked about these issues, MegaFon declined to comment, citing legal restrictions in the United States relating to publicity for the offering.

It may turn out that the concerns over MegaFon amount to much of nothing. Indeed, after Goldman’s pullout, Mr. Usmanov announced that he would maintain voting control of the holding company, an announcement that was probably intended to satisfy people concerned with the corporate governance aspect of this deal. Earlier this week, the company announced that Paul Myners, a former British Treasury minister, would join the board, further beefing up its governance.

Still, it is telling that when Goldman dropped out, none of the other underwriters followed suit. The I.P.O., now scheduled for the end of this month, has been delayed for a few weeks, but Morgan Stanley and Sberbank CIB continue as lead underwriters. Citigroup, Credit Suisse and VTB are also part of the syndicate. The only real holdup appears to be a more extended review by the British listing authority.

This is no surprise. There is always a prominent bank willing to step into any deal.

But this is not how the market is supposed to work. Underwriters are meant to vet clients and work only on offerings that make sense. This duty has been diluted over the years, to the extent it ever existed, by the willingness of investors to overlook a company’s flaws and invest in the next hot issue. And so banks have blindly followed heed, failing to fulfill their gatekeeping responsibilities.

There are plenty of other examples. Take the Facebook offering. Morgan Stanley, the lead underwriter, appeared unwilling to push back on its prominent client, and the market became overstuffed with Facebook shares. And how else to explain I.P.O. disasters like Caesars Entertainment, which went public in February at $9 a share, closed that day at $15.39 and is now worth less than $5 a share? The company had too much debt for the public markets, but Credit Suisse and Citigroup, the lead underwriters, still sold it. Earlier, there was the dot-com bubble. I could go on.

And that is why the Goldman withdrawal is a big deal. That a big bank would pull out indicates that someone on Wall Street is starting to have qualms about what gets taken to market these days. There may just be a recognition by Goldman, however belated, that underwriting means something more than simply selling anything it can.

MegaFon is attractive to investors because it is a growth company and promises to pay a dividend with a 7 to 8 percent yield, an extraordinarily high rate of return in today’s low interest-rate environment. Investors may overlook the corporate governance risks and rush to buy shares like lemmings over the proverbial cliff.

Given what’s happened over the last decade, no one would really be surprised that once again, investors sometimes can’t help themselves. And, if so, we may also be asking again, where were the gatekeepers?