MMM (pyramid)

From Bvio.com

This article is about the Russian company, for the US company formerly called Minnesota Mining and Manufacturing, see 3M

MMM was the company that perpetrated the largest pyramid scheme in Russia in 1990s, with the possible exception of the GKO government pyramid scheme. It involved at least 2 million people and possibly collected an amount of money equivalent to as much as 1.5 billion dollars.

The company 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 an abbreviation of 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 problems with getting loans. Faced with difficulties in financing its foreign trade, the company switched to financial sector. It offered American stocks to Russian investors, but didn't achieve much success. Later MMM-invest was created for collecting vouchers during privatisation, also with limited success.

The business that MMM is most remembered for started in the mid-1993. The company started attracting money from private investors, promising up to 1000% annual returns. It is unclear whether building the pyramid was Mavrodi's initial goal, as 1000% returns were certainly possible during the hyperinflation in areas such as import-export operations.

But the company grew like a snowball and that made this gigantic scam possible. In February 1994 MMM reported dividends of 1000% and started an aggressive TV ad campaign. Since the shares were not quoted on the stock exchange and the company itself determined the share price, it maintained a steady price growth (thousands of percent annually), leading the public to believe its shares were a safe and profitable investment. An important factor was the word of mouth, but most of the company's success came from their extremely aggressive ad campaign, appealing to the general public by using "ordinary" characters viewers could idenify with. The most famous of them, a "folk hero" of early 1994, was Lyonya Golubkov. Another notable marketing effort was providing free metro trips to all Moscow citizens during one 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 heyday the company earned more than 20 billion roubles (about 11 million USD) each day from the sale of its shares to the public. According to estimates, between 2 and 5 million people "invested" in MMM.

Regular publication in the media of the growing MMM share prices led President Boris Yeltsin to issue a decree in June 1994 prohibiting financial instutions from publicising the expected income.

The "success" of MMM led to creation of other similar companies, including Tibet, Chara, Khoper-Invest, Telemarket, Germes, etc. All these companies were characterised by aggressive television advertisement campaigns and extremely high promised return rates (one company promised 30000% annual returns).

On Jule 22, 1994 the police closed the offices of MMM for tax evasion. For a few days the company attempted to continue the scheme (and there was an unsuccessful attempt to start selling bonds instead of shares later), but could not avoid the panic and soon stopped the operations. At this point Invest-Consulting, one of the company's subsidaries, owed more than 50 billion roubles in taxes (26 million dollars) and MMM itself owed between 100 billion and 3 trillion roubles to the "investors" (from 50 million to 1.5 billion dollars). In the aftermath at least 50 investors, having lost all their money, commited suicide.

Several organisations of "deceived investors" were formed, trying to return the investments, but Sergey Mavrodi manipulated their indignation and directed it at the government. In August 1994 Sergey Mavrodi was arrested for tax evasion, but soon he was elected to Russian Duma, using the support of the "deceived investors", arguing that the government was responsible for people losing their money and promising to initiate a pay-back program. However, it was just an empty promise - the amount paid back was extremely small, compared to the amount owed.

In October 1995 the Duma cancelled his right to immunity as a deputy (mostly for being absent at most hearings). In 1996 he tried to run for Presidential office, but most of the signatures were rejected. MMM was declared bankrupt on September 22, 1997. It was believed that Sergey Mavrodi left Russia and moved to the United States. With the help of his distant relative he started Stock Generation Ltd., another pyramid scheme based around trading non-existent companies' stocks on the company's site, stockgeneration.com. Between 20 and 275 thousand people (according to various estimates) fell for the promised 200% returns and lost their money. However, most likely Sergei Mavrodi actually stayed in Moscow, using his money to change apartments regularly and being guarded by a group of former special agents. He was found and arrested in 2003.

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

When the Russian government executed its own GKO pyramid scheme starting in 1995, which culminated in the collapse of 1998 and the government's default, Sergey Mavrodi published on the Internet a warning about its imminent collapse three months in advance.

The MMM scandal led to increasing regulation of the stock market, although it was arguably too late, as most people became extremely suspicious of any joint stock companies. The popularity and inevitable collapse of MMM was likely one of the major reasons that the stock market and the banking system of Russia stayed underdeveloped for a decade. As of 2004, there have been only two IPOs and the combined assets of all Russian banks are less than of a single major Western bank.

Sources

• Cергею Мавроди вернули должок - Commersant, 01.02.2003