The story of MMM and why the frenzy may not last

What is MMM? Succinctly, MMM is a Ponzi scheme company, established 1989 in Russia by Sergei Mavrodi, his brother Vyacheslav Mavrodi, and Olga Melnikova. The name of the company was taken from the first letters of the three founders' surnames.

Initially, the company imported computers and office equipment, but in 1992, tax police accused MMM of tax evasion, leading to the collapse of the 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, offering American stocks to Russian investors, but met with little success. Later, MMM-Invest was created for the purpose of collecting vouchers during privatization, and ended up a similarly unsuccessful venture.

The ‘successful’ MMM Ponzi scheme was however created in 1994. The company started attracting money from private investors, promising annual returns of up to one thousand percent, though it is unclear whether a Ponzi scheme was their initial intention.

In February 1994, the company reported dividends of 1,000%, and started an aggressive media 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, (mis)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, especially from the initial investors who have collected returns; and their friends, colleagues and family who are witnesses to the enviably ‘upgraded lifestyle’. But most of the company's success came from its extremely aggressive ad campaigns, which appealed to the general public by using ‘ordinary’ characters that viewers could identify with.

At its peak, the company was taking in more than about $50 million each day from the sale of its shares to the public. Thus, the cashflow turnover at the MMM central office in Moscow was so high that it could not be estimated. The management started to count money in roomfuls: “1 roomful of money, 2 roomfuls of money”, etc.

In July 1994, Russian 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 $26 million in taxes, and MMM itself owed between $50 million to $1.5 billion to the investors.

In the aftermath, at least 50 investors, having lost all of their money, committed suicide.

Several ‘deceived investors’ made efforts to recover their lost investment, but the Directors manipulated their indignation and directed it at the Russian government. In August 1994, they were arrested for tax evasion.

However, Mavrodi was soon elected to the Russian State Duma (Russia’s Lower House), with the support of the ‘deceived investors’, after arguing 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.

It might be pertinent to note that MMM declared bankruptcy on September 22, 1997. While it was believed that Sergei Mavrodi left Russia and moved to the United States, it is possible that he stayed on in Moscow, using his acquired fortune to change apartments regularly and employing a group of former special agents.

Mavrodi was found and arrested in 2003. At the end of April 2007, he was convicted of fraud, and given a sentence of four and a half years. 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.

With the help of a distant relative, he again started Stock Generation in the United States, 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 all their money. According to the U.S. Securities and Exchange Commission, losses of victims were at least $5.5 million.

In 2015, the scheme moved to South Africa with the same business model as MMM-2011, claiming a "30% per month" return through a "social financial network". The group was quickly identified as a possible Pyramid scheme by the National Consumer Commission and accounts of clients were later frozen by Capitec Bank.

In November 2015, MMM launched a website targeting the Nigerian audience, also claiming a "30% per month" return. The entity was self-described as a "mutual aid fund where ordinary people help each other”. And by December 2016, about 2.5 million people had signed up, with our unemployed as primary targets.

Car bought by MMM Promoters in Nigeria.
Courtesy: NAIJ.com

A Ponzi scheme is a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first set of investors from money invested by later investors.

The Ponzi scheme is named after Charles Ponzi (1882-1949), an Italian businessman and con artist in the U.S. and Canada, who carried out such fraud especially from 1919; he was arrested on August 12, 1920, and charged with 86 counts of mail fraud. He was the infamous swindler who paid out returns with other investors' money.

In the same vein, a Pyramid Scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products and services. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.

Pyramid schemes have existed for at least a century in different guises. Even some multilevel marketing plans have been classified as pyramid schemes.

The possibility of the scheme defaulting at a point is discernible to a 100 Level student of Economics, Accounting or other disciplines, but even our graduates and the intelligentsia are neck-deep, enrolling daily for the scheme.

Arguments are awash the mass and social media; and you need to listen to, or read some of them trying to rationalise the scheme, even throwing jabs at the government of the day and glorifying MMM for the rescue.

However, some other intelligent and analytical minds already have a good grasp of the situation. On Facebook, Olayinka Oluwakuse III put it aptly when he said: "trying to convince people that MMM is a scam is like trying to convince a drunk that the two lights he sees coming down the road is a car and not two bikes, it outshines logic. It's only when he's been hit by the car that logic sets in.”

Reputable banks and financial institutions, including the regulatory Central Bank of Nigeria and the Securities and Exchange Commission have warned Nigerians against the Ponzi scheme, and the EFCC says it is ‘closely monitoring’ the scheme. Amidst the warning from them however, some Nigerians are bent on continuing with the scheme and discarding any claims or reason that the scheme is fraudulent and financially risky.

Ponzi and other suspicious schemes thrive in depressed economies where the pressure and hopelessness of people makes them vulnerable to exploitation. MMM even executes so-called initiatives of benevolence, not CSR, dashing boreholes to thirsty communities, making the people see them as more concerned and as such more caring than government, thus attempting to rationalize their gullibility. 
Clips and pictures of churches allotting publicity time to the promoters of the scheme to talk to, convince and recruit their miracle-seeking congregation. Notwithstanding the inglorious history of MMM, it is still seriously romanced by Nigerians. But trust them  later to run to the government for help in recovering their ‘investment’ after the cookie crumbles. 
Ponzi schemes are bound to fail sooner than later; so says history, so says logic, as well as reason. Take heed!

Details from Wikipedia and other reference books. 
Additional reports by ‘Dele Dele-Olukoju, Marketing Communication consultant and publisher of the online Marketing Communication Digest. He writes from Lagos, Nigeria.