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Ponzi_scheme

MMM (Ponzi scheme)

MMM was a Russian company that perpetrated one of the world's largest Ponzi schemes in the 1990s. At least two million people were duped in the fraud, losing as much as $1.5 billion. The MMM scheme is often compared to the alleged GKO Russian government pyramid scheme in terms of its success.

MMM was established in 1989 by Sergey Panteleevich Mavrodi, his brother Vyacheslav Mavrodi, and Marina Muravieva, Vyacheslav's future wife. The name of the company was taken from the first letters of the three founders' surnames.

Initially, the company imported computers and office equipment. In January 1992, tax police accused MMM of tax evasion, leading to the collapse of MMM-bank, and causing the company to have difficulty obtaining financing to support its operations. Faced with difficulties in funding its foreign trade, the company switched to the financial sector. It offered American stocks to Russian investors, but met with little success. Later, MMM-invest was created for the purpose of collecting vouchers during privatisation. This effort was similarly unsuccessful.

MMM created its successful Ponzi scheme in mid-1993. The company started attracting money from private investors, promising annual returns of up to one thousand percent. It is unclear whether operating a Ponzi scheme was Mavrodi's initial goal, as such nominal returns might have been possible during the hyperinflation in areas such as import-export operations.

MMM grew rapidly. In February 1994, the company reported dividends of 1,000%, and started an aggressive TV ad campaign. Since the shares were not quoted on any stock exchange and the company itself determined the share price, it maintained a steady price growth of thousands of percent annually, leading the public to believe its shares were a safe and profitable investment.

An important factor in the scheme's success was word of mouth, but most of the company's success came from its extremely aggressive ad campaign, which appealed to the general public by using "ordinary" characters that viewers could identify with. The most famous of them, a "folk hero" of early 1994, was Lyonya Golubkov. Another notable marketing effort was a giveaway of free Metro trips to all Moscow citizens on a particular day. MMM also was one of the first well-known companies in Russia with a logotype and slogans ("Flying from shadow to the light" and others).

At its peak the company was taking in more than 20 billion rubles (about 11 million USD) each day from the sale of its shares to the public. According to estimates, between two and five million people invested in MMM.

Regular publication in the media of the rising MMM share price led President Boris Yeltsin to issue a decree in June 1994 prohibiting financial institutions from publicising their expected income.

The success of MMM in attracting investors led to the creation of other similar companies, including Tibet, Chara, Khoper-Invest, Selenga, Telemarket, and Germes. All of these companies were characterised by aggressive television advertising and extremely high promised rates of return. One company promised annual returns of 30,000%.

On July 22, 1994, the police closed the offices of MMM for tax evasion. For a few days the company attempted to continue the scheme, but soon ceased operations. At that point, Invest-Consulting, one of the company's subsidiaries, owed more than 50 billion rubles in taxes (USD 26 million), and MMM itself owed between 100 billion and 3 trillion rubles to the investors (from USD 50 million to USD 1.5 billion). In the aftermath at least 50 investors, having lost all of their money, committed suicide.

Several organisations of "deceived investors" made efforts to recover their lost investments, but Sergey Mavrodi manipulated their indignation and directed it at the government. In August 1994 Mavrodi was arrested for tax evasion. However, he was soon elected to the Russian State Duma, with the support of the "deceived investors". He argued that the government, not MMM, was responsible for people losing their money, and promised to initiate a pay-back program. The amount ultimately paid back was minuscule compared to the amount owed.

In October 1995, the Duma cancelled Mavrodi's right to immunity as a deputy. In 1996, he tried to run for Russia's presidency, but most of the signatures he received were rejected. MMM declared bankruptcy on September 22, 1997.

While it was believed that Sergey Mavrodi left Russia and moved to the United States, it is possible that he stayed in Moscow, using his money to change apartments regularly and employ a group of former special agents. With the help of a distant relative he started Stock Generation Ltd., another pyramid scheme based around trading non-existent companies' stocks in a form of the "stock exchange game" on the company's site, stockgeneration.com. Despite a bold-letter warning on the main page that the site was not a real stock exchange, between 20,000 and 275,000 people, according to various estimates, fell for the promised 200% returns and lost their money. According to U.S. Securities and Exchange Commission, losses of victims were at least USD 5.5 million.

Mavrodi was found and arrested in 2003. While in custody, Mavrodi was given until January 31, 2006 to read the documents in his fraud case against him. (The criminal case consists of 650 volumes, each 250-270 pages long.) At the end of April 2007, Mavrodi was convicted of fraud, and given a sentence of four and a half years. Since he had already spent over four years in custody, he was released less than a month later, on May 22, 2007.

Vyacheslav Mavrodi started MMM-96, a smaller and apparently more legal pyramid scheme, but was arrested in 1998.

The MMM scandal led to increased regulation of the Russian stock market, but the legacy of the fraud led many to become extremely suspicious of any joint stock companies.

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