MMM was a Russian company that perpetrated one of the world's largest pyramid schemes in the 1990s.[1] It involved at least two million people and collected as much as $1.5 billion. Notably, the MMM scheme is often compared to the alleged GKO Russian government pyramid scheme in terms of its success.
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 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 problems getting loans. Faced with difficulties in financing its foreign trade, the company switched to the 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 mid-1993. The company started attracting money from private investors, promising annual returns of up to one thousand percent. It is unclear whether building the pyramid was Mavrodi's initial goal, as such nominal returns might have been possible during the hyperinflation in areas such as import-export operations.
The company grew rapidly. In February 1994, MMM 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 of the scheme's success was 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 identify with. The most famous of them, a "folk hero" of early 1994, was Lyonya Golubkov. Another notable marketing effort was the giving away of 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 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 growing MMM share prices led President Boris Yeltsin to issue a decree in June 1994 prohibiting financial institutions from publicising the expected income.
The "success" of MMM led to creation of other similar companies, including Tibet, Chara, Khoper-Invest, Selenga, Telemarket, and Germes. All of these companies were characterised by aggressive television advertisement campaigns and extremely high promised return rates (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 stopped the operations. At this point, Invest-Consulting, one of the company's subsidiaries, owed more than 50 billion rubles in taxes (26 million dollars) and MMM itself owed between 100 billion and 3 trillion rubles to the "investors" (from 50 million to 1.5 billion dollars). In the aftermath at least 50 investors, having lost all their money, committed 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 State 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, 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. 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.
Screenshot of a Stock Generation webpage
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 time until January 31, 2006 to read the documents in his case on financial fraud (the criminal case consists of 650 volumes, each 250-270 pages long). At the end of April 2007 Mavrodi was charged with fraud and given a sentence of 4 years and 6 months. Of these, Mavrodi had spent over four years in custody already. Less than a month later, on May 22, 2007, Mavrodi was released.
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, although it was arguably too late, as most people became extremely suspicious of any joint stock companies
MMM (pyramid)
