Self-Described "Financial Pyramid" Collapses in Russia; Police Open Criminal Investigation

“It’s necessary to face the truth – it’s impossible to run the MMM-2011 anymore…There is naturally not enough money for everybody in the pyramid so the MMM-2012 [Mavrodi’s new ponzi scheme] will help…We will take some money from it,” 

-Sergei Mavrodi

Russian police have opened a criminal investigation into potential fraud surrounding the unraveling of a company whose founder, Sergei Mavrodi, readily admits he is operating a pyramid scheme.  MMM-2011, which was started by Mavrodi in 2011, is estimated to have upwards of thirty-five million participants who invested in the scheme despite Mavrodi's warnings that the company is a Ponzi scheme, and that the depositors run the risk of losing their money at any moment.  After word spread about the police investigation and scrutiny intensified on the legitimacy of MMM-2011, Mavrodi recently disclosed that there was not enough money left in the pyramid to make each investor whole, and announced the creation of a new scheme, MMM-2012.  

Mavrodi is well-known in Russia, having previously served several years in jail for operating a pyramid scheme called "MMM" in the early 1990s.  That scheme, which had between two to five million investors including high-profile celebrities, solicited investors through an aggressive TV and radio campaign and promised returns of up to one thousand percent.  Because the company was not traded on any stock exchange, the company itself determined its share price and reported it to the public through newspapers.   When the scheme collapsed in 1994, cumulative investor losses totaled approximately $1.5 billion, and over 50 investors committed suicide.  After Mavrodi briefly dabbled in politics - entitling him to immunity - he disappeared, and was then found and arrested in 2003.  In April 2007, he was convicted of fraud and sentenced to four years in prison.  Having been in custody since 2003, he was soon released after receiving credit for time served.

MMM-2011 was launched in January 2011.  Apparently taking several pointers from the failure of the original MMM scheme, MMM-2011 sold investors virtual currency units called "Mavros" that claimed to increase exponential in value over various currencies.  Investors could buy Mavros with different growth rates for varying time periods, realizing profits when the Mavros were sold back to the system at their present value.  According to the projects website, 

You just have to get registered (and get your bonus $20 as a registration gift), join the System, 'buy' your MAVRO money, and keep on lying on your couch and watching how rapidly your capital grows in value, with up to 20 or 30% of gain a month. (Note that your deposit grows even faster, up to 75% each month.

The operation makes it clear to potential investors that they are participating at their own risk, explaining that "There are no rules. The only rule is that there are no rules at all!"  Following its creation, many questioned the legitimacy of the scheme, with the Federal Antimonopoly Service issuing an opinion in February 2011 that MMM-2011 had many attributes of fraud and was a pyramid scheme, as it would never bring about the advertised profitability.  

Despite its advertised fraudulent nature, MMM-2011 gained popularity and was estimated to have millions of investors.  However, its downward spiral began in late May, when experts from Russia's Higher School of Economics ("RHSE") speculated that the scheme could soon file for bankruptcy.  Following the report, Mavrodi seemingly confirmed the dire condition of MMM-2011, releasing a video message to inform investors he had commenced a "Phoenix" operation to save the pyramid, and immediately reducing the yield on deposits from 40% to 10% monthly.  Additionally, all unprofitable units were closed.  Experts from RHSE surmised from Mavrodi's actions that the scheme could implode soon, and estimated that the scheme could implode as soon as June 2012.

Following the RHSE report, authorities opened an investigation into a "group of unidentified persons".  However, Mavordi's lawyer was quick to point out that Mavordi was neither the founder nor operator of MMM-2011, instead clarifying that Mavrodi was an "advisor" who gave recommendations to clients.  In response, Mavrodi announced that he was started MMM-2012.

With Mavrodi's Saturday announcement that not enough money remained to pay all participants, the pyramid has essentially imploded.  The lifeblood of a Ponzi scheme comes from the constant inflow of funds to ensure that enough money exists to make the continuing interest payments to existing investors.  With the intensified scrutiny surrounding MMM-2011, it is likely that many investors made requests for principal redemptions, likely depleting all funds.  Taking a cue from recently convicted financier Allen Stanford, Mavrodi lashed out at Russian authorities for commencing a criminal case against him, saying it had contributed to the downfall of his business.

If anything can be taken from today's announcement, it is that the pain is only beginning for MMM-2011 investors.  At least one investor has committed suicide, and as more information is obtained about the sheer magnitude of the scheme and amount of money lost, that figure is likely to change.

In a review of Mavrodi's website touting the new MMM-2012 scheme, he explains in the "Rules" section that:

WARNING!

WARNING!

This is a pyramid scheme!

This is a pyramid scheme!

This is a pyramid scheme!

Judging from recent history, it appears that the disclaimers will be only symbolic.

A link to Mavrodi's webpage touting MMM-2012 is here. (Note - webpage is in Russian)