“MMM” is not as good as it sounds: The Man behind One of the Largest Ponzi Schemes

Running head: MMM PONZI SCHEME 1

“MMM” is not as good as it sounds: The Man behind One of the Largest Ponzi Schemes

Daria D. Jolobova

University of Florida

MMM PONZI SCHEME 2

“MMM” is not as good as it sounds: The Man behind One of the Largest Ponzi Schemes

The economy of post-Soviet Russia was not kind to its dependents. According to Baranov

& Somova (2015), the specific period of 1994-1999 saw Russia go through an inflation which

was implemented by the decisive factor of monetary policy. At the time, the Central Bank of

Russia saw interest rates increase and the growth of production plummet. This pattern devastated

Russian citizens and caused them to seek out desperate measures in order to survive during the

economic crisis. In 1994, mathematician, Sergei Mavrodi, decided to bring a financial miracle to

the public by forming the MMM investment firm (Cross, 2016). Mavrodi used alluring television

and newspaper advertisements that promoted lavish vacations abroad to America as incentives

(Malkiel & Mei, 1999). Sogrin (2014) argues that the post-Soviet perspective of America was

that of ambivalence and prospect. Therefore, Russia’s people had been fed information that was

specifically tailored to their lusts and desires of pursuing a lifestyle that was fueled by the

intrinsic sense of freedom. Additionally, MMM had promised an annual return of 2,000 percent

with no minimum investment (Spira, 1997).

It did not take long until MMM went global and took hold of 15 million investors.

Unfortunately, Russia’s trust ended up being broken yet again, as these tactics were not

conducted under legal circumstances. It was revealed that Mavrodi had constructed his company

as a Ponzi scheme that collectively took hold of 10 billion U.S. dollars (Cross, 2016). It was

admitted that at least 50 of the investors had lost all of their money and as a result, committed

suicide (Gogozan, 2009). Mavrodi’s Ponzi scheme was once known as the largest Ponzi scheme

in history until Bernie Madoff’s fraud overtook the number one position (Cross, 2016). Mavrodi

had only served a four and a half year prison sentence for his initial act of fraud. Despite the

public outcry of their lost investment money combined with the illegal activity of the MMM

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investment company, Mavrodi was able to escape numerous criminal prosecution charges over

his lifetime (Cross, 2016).

According to Gogozan (2009), Mavrodi has managed to setup similar companies called

Tibet, Chara, Khoper-Invest, Selenga, Telemarket and Germes. As admitted in his book,

Mavrodi currently holds his influence by running pyramid schemes that expand through India

and China (Cross, 2016). The key to Mavrodi’s financial success is to take in small sums of

money from as many investors as possible, while still claiming to remain within the intent of the

law (Cross, 2016). (Geis, 1995, pp. 462-464), argues that occupational crime is more likely to

occur when the means for achieving one’s goals are met with illegitimate opportunities.

The setup by Mavrodi with the MMM investment firm is classified under occupational

criminal behavior. More specifically, this bogus investment scheme is considered to be an

occupational crime where the primary beneficiary is the individual (Sergei Mavrodi) and the

secondary beneficiary is the organization (MMM investment fund) (Holtfreter, 2005). MMM

was initially created as a company that would import office and technological equipment (Cross,

2016). In order to overcome the difficulty of gaining credit for financing the business, Mavrodi

designed a Ponzi scheme that targeted private investors and promised prosperous returns (Rock

& Solodkov, 2001). As more investors joined, the funds were used as capital for the business and

as a result the share price; which was conducted by Mavrodi’s calculations, rose at a rapid pace.

It was not until 1994 when Mavrodi decided to become the primary beneficiary of these funds

(Bhattarcharya, 2003).

Literature Review

It is unclear as to whether or not Sergei Mavrodi was an admirer of the work of Charles

Ponzi. Charles Ponzi was an Italian immigrant who is known as the creator of the Ponzi scheme

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(Cross, 2016). In 1920, Ponzi originated an investment strategy in Boston that had a goal to

provide 100 percent profit in a time span of three months (Frunza, 2015). During that same year,

the scam had collapsed just as quickly as it had started and racked up losses that amount to 230

million dollars (Frunza, 2015). Regardless if Mavrodi was inspired by Ponzi himself, it is evident

that Ponzi schemes have been prominent in regions where there are unstable novice economies

or there is political unrest (Frunza, 2015). Although there has been little research conducted on

Sergei Mavrodi himself, his creation of the MMM Ponzi scheme has shed light on his affiliation

when it comes to marketing and economical publications. Mavrodi’s actions have caused him to

then become the sixth richest man in the world (Bhattarcharya, 2003).

When distinguishing between Ponzi and pyramid schemes it is important to note that

Mavrodi had participated in both. Both Ponzi and pyramid schemes take money from late

investors in order to pay early investors. The crucial difference between them is that, in Ponzi

schemes, the creator takes possession of the majority of the money generated (Cross, 2016).

Also, in a pyramid scheme participants are required to recruit new investors in order to receive

the promised payoff (Bhattarcharya, 2003).

Origin and Impact of Mavrodi’s Scheme

Modus Operandi. Originally, MMM was formed as an importer of computer and office

equipment in 1989 (Puscaciu, V., Mihalache, & Puscaciu, R. M., 2014). MMM was founded by

Sergei Mavrodi, his brother Vyacheslav Mavrodi, and Olga Melnikova (Cross, 2016). The

company’s name was created by taking the first initial of each of the founders’ last name (Cross,

2016). Business for MMM was not thriving and funding for the company was sparse, especially

when the inflation hit Russia in 1994 (Rock & Solodkov, 2001). During this time, Mavrodi

decided to take advantage of Russia’s lack in market regulation and the vulnerability of the

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public. Mavrodi designed a Ponzi scheme that promised up to 2,000 percent annual return by

investing in MMM (Cross, 2016). The use of glamorous television commercials proved effective

for Mavrodi in recruiting up to five million investors within the first year of the scheme

(Bhattarcharya, 2003). These commercials were first streamed in Russia and featured the “rags to

riches” story of a fictional character named, Lyonya Golubkov (Frunza, 2015). The commercial

saw Golubkov tell his story of how his life was transformed from being a tractor operator to

vacationing in San Francisco and buying his wife fur coats (Cross, 2016). Another television ad

showed Golubkov counting bags full of money (Cross, 2016). The Russian public was in awe of

this tale and seemingly did not pay any mind that Golubkov was an actor hired to advertise on

Mavrodi’s behalf (Gogozan, 2009).

Despite the fact that all of this seemed too good to be true, Mavrodi’s investment scheme

came at an appropriate period in Russia’s economic desperation. The illusion of gaining a large

amount of money was being promoted when Russia’s inflation had been at 25 percent per month

(Cross, 2016). Nevertheless, Mavrodi managed to take possession of $10 billion from an

estimated 15 million people (Cross, 2016). Bhattarcharya (2003), emphasized that the key

features which influenced the success of Mavrodi’s 1994 Ponzi scheme, were the initial non-

discouragement by regulators and the safety of a partial bailout in case of a collapse. Mavrodi

did not invest the capital gained from new investors since these so-called investments could not

come up with the high returns that MMM had promised (Malkiel & Mei, 1999).

Although MMM never revealed how money was generated, at the time, Russian citizens

were intrigued by this “get rich quick scheme” and they entrusted Mavrodi to give that to them

(Schoors, 2003). On July 27, 1994 the Finance Ministry sent a warning about the stock company

and stated that it would not back up their investments (Malkiel & Mei, 1999). Instantly, share

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prices dropped to 45 cents and thousands of shareholders stood outside of MMM’s Moscow

office (Gogozan, 2009). Mavrodi then announced that none of the shares were going to be

redeemed because the government had destroyed them (Malkiel & Mei, 1999). He had not

admitted that the five million investors were putting money into a worthless stock that led

straight to Mavrodi’s pocket.

The collapse of MMM put doubt into the public’s confidence when it came to Russian

capitalism. Mavrodi took advantage of people’s money by emphasizing that the government set

few regulations in requiring companies to reveal information to investors and the fact that in

1994 there had not been a law that set enforcement actions on companies which failed to comply

within business regulations (Malkiel & Mei, 1999).

Mavrodi’s “punishment.” While pyramid schemes seem unethical, they happen to be

legal in various parts of the world, this includes Russia (Cross, 2016). Though Mavrodi carefully

designed most of his investment firms as pyramid schemes, in 1994 the government reacted to

public disdain from his MMM Ponzi scheme by attempting to arrest him for tax evasion (Malkiel

& Mei, 1999). In response Mavrodi quickly devised a plan to avoid jail time by getting his

shareholders to vote for him in the approaching election (Gogozan, 2009). After creating his own

political party, “the Party of People’s Capital,” Mavrodi won the election by advocating recovery

of the shareholders’ losses during his MMM scandal (Malkiel & Mei, 1999). With this election

victory and a spot in the Russian State Duma, Mavrodi took advantage of Russia’s new

constitutional provision which protected legislators by exempting them from serving jail time

(Malkiel & Mei, 1999). Even after Mavrodi joined the Duma, previous MMM shareholders have

not seen a single payoff (Malkiel & Mei, 1999).

Criminological theories

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(Geis, 2002, pp. 110-112), alluded to the use of techniques of neutralization by

Westinghouse when being indicted for price-fixing. Their arguments in court stated that they did

not seek money for personal gain and that they were high status respectable citizens who had no

chance of recidivism. The same neutralization theory can be applied to Mavrodi’s 1994 MMM

Ponzi scheme. Whenever Mavrodi would be questioned as to why shareholders were not granted

redemptions after MMM had its collapse, the answer would always be diverted in the direction

of the central government (Cross, 2016). During this time of inflation, Russian investors were

easily manipulated by Mavrodi and would believe virtually anything to get their money back.

(Akers & Sellers, 2013, pp. 23-27) highlight Rational Choice Theory as one that is based on the

expected utility principle in economics. The theory focuses on the principle that rational

decisions are made by weighing the choice of maximizing profits and minimizing losses. With

Mavrodi, he used the promised annual return of 2,000 percent to his investors as a way to

maximize his personal gain.

Techniques of neutralization. Siponen & Vance (2010), identify five basic techniques

of neutralization when it comes to white-collar criminality. The first one is denial of

responsibility, which means that the offender viewed themselves as not being responsible for the

act committed. The second technique is denial of injury, where the offender’s justification is

built upon reducing the harm that it actually caused. Computer hacking could be an example as

hackers suggest that computer attacks are not harmful to people. The defense of necessity

happens when breaking the law is seen as being necessary. Condemnation of the condemners

refers to neutralizing the act of crime by putting blame to those who are also the targets.

Computer criminals may blame lack of information security as being irresponsible in their

protective services towards the public. Appeal to higher loyalties argues that violating a law is

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the response to solving an issue of a power struggle. Employees may justify theft by stating that

their employer gave them an order to do so.

In Mavrodi’s case, he appealed to two of these techniques. Specifically, Mavrodi had

claimed denial of responsibility and condemnation of the condemners. The 1994 MMM

investment firm had collapsed and it was revealed to the public that they had been investing in a

fake stock. As his rebuttal, Mavrodi never admitted that he invented the company to act as a

Ponzi scheme. This act was his denial of responsibility. In his favor, MMM’s investors had been

more focused on discovering a plan that could assist in reimbursing their monetary losses

(Frunza, 2015). Russia’s people yearned for another financial miracle that would reproduce

money just as quickly as when the investment firm was created. Oddly, the initial Russian

mentality was to ignore the government warning of the illegitimacy in MMM stock. Instead,

Russians fled to MMM’s main office in Moscow with hopes that Mavrodi could mend their

losses (Cross, 2016). As for Mavrodi’s condemnation of the condemners, he deflected the blame

from himself by holding the government’s lack of economic policy responsible. When his

investors relied on Mavrodi for an explanation, his instinctual reaction was to place blame on the

central government for ruining the shares (Malkiel & Mei, 1999). Mavrodi claimed that he

managed to go through with the Ponzi scheme because of the lack of market regulations and at

the time there had not been a provision that protected the investors from financial fraud (Malkiel

& Mei, 1999).

Rational choice theory. This theory draws influence from the economic principle of

expected utility. In an economic setting people will make decisions that will maximize their

profits and decrease their costs (Akers & Sellers, 2013, pp. 23-27). In relation to crime,

theoretically a crime happens after the individual has consciously weighed the costs and benefits

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of the act. Rational choice theory has been known as a theory that is essentially logical and

parsimonious (Akers & Sellers, 2013, pp. 23-27). Mavrodi knew that he was going to be the

primary beneficiary of the profits when he created and released his first MMM Ponzi scheme in

1994 (Cross, 2016). His losses claimed to be virtually nonexistent as Mavrodi took advantage of

the knowledge that the central government did not possess the role in regulating markets. Also,

Mavrodi internally knew that when the MMM scheme would get exposed, there would not be a

law to incriminate him. In other words, Mavrodi had far more benefits than costs when creating

MMM investment firm. He had a sense that the Russian public was desperate for money, as they

were experiencing hyperinflation in 1994 and political instability had caused people to lose

confidence in capitalism (Malkiel & Mei, 1999). This vulnerability and search for hope was the

perfect opportunity for Mavrodi to strike it rich at a low expense.

Prevalence of illegal investment schemes

(Cross, 2016), claimed that Mavrodi’s 1994 Ponzi scheme had taken $10 billion from

about 15 million investors. This took place in a period of five months during the summer (Cross,

2016). The quick timing is a key pattern in Ponzi schemes, as the schemes tend to fall apart just

as quickly as they originated (Nolasco, Vaughn, & Del Carmen, 2013). Frunza (2015) points out

that Ponzi schemes which generate the biggest losses are mostly found in the United States.

Several Asian countries are also climbing up the Ponzi scam rankings by diversifying their

assets. One example of this includes their fascination with designing crypto-currencies (Frunza,

2015). Bernie Madoff’s 2008 pyramid scheme is perhaps the most well-known and certainly the

largest scam in the world (Cross, 2016). Madoff paid early investors with later investors’ money

and managed to give 15 percent returns on these investments (Ionescu, 2010). It is estimated that

Madoff’s fraud amounted to about $64.8 billion based on the accounts of his 4,800 clients

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(Ionescu, 2010). Many of Madoff’s victims had blamed him as being responsible for the 2008

economic decline in the U.S. (Ionescu, 2010). From 1992 to 1994, Romania saw a pyramid

scheme named “Caritas,” which collaborated with the mayor of the Party of Romanian National

Unity (Verdery, 1995). This Romanian scheme drew in investors by promising returns of up to

eight times the original investment. People were inclined to invest as the inflation had been

between 250-300% at the time (Verdery, 1995). In its decline, about four million investors lost

up to about $1 billion (Frunza, 2015).

Mavrodi today. After being released from prison in 1994, Mavrodi was rumored to have

moved to the U.S. and MMM had declared bankruptcy (Gogozan, 2009). Mavrodi has created

two more schemes under the names MMM-2001 and MMM-2011 (Cross, 2016). MMM went

global as it had setup offices in Lithuania, Ukraine, and Belarus attracting millions of investors.

The company was also operating under a changed name, this time around the “MMM” stood for

the Russian phrase, (Mi Mozhem Mnogoye) which translates to “we are capable of a lot.” (Cross,

2016). The marketing strategy in these eastern European countries had been advertised as a

means to get rich quick and was exposing government lies and exploitations that took place

(Cross, 2016). Mavrodi kept in business by designing the schemes in a way that the monetary

transactions occurred through the investors’ accounts. This allowed him to avoid legal matters

and soar under the radar. His scheme promised up to 80% profit in the first month which was

built on six levels. With the regular investors at the bottom and supervisors that reported

financial transactions at the top, each level took a cut of the profits (Cross, 2016). Of course,

Mavrodi had inserted himself at the tip of the scheme so the transactions did not go through him

and if there was a dispute, it would be impossible to blame him for the losses (Cross, 2016). In

1997, Mavrodi started a series of online pyramid schemes based on trading nonexistent stocks

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(Gogozan, 2009). Although each website advertised that the company was not a legitimate stock

exchange, an estimated 20,000 to 275,000 victims had fallen for the promised 200% annual

returns (Gogozan, 2009). MMM had provided the convenience of a virtual currency, called

MAVRO (Puscaciu, V., Mihalache, & Puscaciu, R. M., 2014). If one makes a deposit or wants to

sell their MAVRO, they are free to do so at a certain rate to their foreman (Puscaciu, V.,

Mihalache, & Puscaciu, R. M., 2014). The foreman is always replaceable so deposits are not

affected if one foreman is gone. In 2003, it was announced that Mavrodi had been arrested for

fraud in Moscow (Gogozan, 2009). Even though Mavrodi was physically unable to cause more

financial harm, several of his associates in MMM India were arrested in 2013 (Cross, 2016).

Mavrodi stated that the next possible MMM scandal is to be setup in China (Cross, 2016).

Conclusion

In 1994, Sergei Mavrodi devised the second largest Ponzi scheme by transforming an

office equipment importer into a phony MMM investment firm (Spira, 1997). Building off of

Russia’s economic inflation in 1994 and public desperation for money, Mavrodi promised up to

2,000% annual returns (Baranov & Somova, 2015). The use of media and television ads saw the

fictional hero, Lyonya Golubkov, reveal his story of how he was able to go from nothing to

going on vacations abroad (Cross, 2016). Mavrodi managed to escape criminal charges because

the government had not set strict regulations on the market. In this way, Mavrodi was able to use

neutralization techniques by blaming the central government for their lack of public protection

(Cross, 2016). Since then Mavrodi’s scheme has been witnessed in a virtual setting that created

internal currency (Puscaciu, V., Mihalache, & Puscaciu, R. M., 2014). Similar MMM schemes

were developed in Eastern Europe and central Asia (Cross, 2016). Despite the damages that

Mavrodi has caused, he claims that the money gained is not for personal fulfillment but rather a

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goal of a financial apocalypse (Puscaciu, V., Mihalache, & Puscaciu, R. M., 2014). Mavrodi

states that, “the system must be destroyed and something else be built in its place. That’s

precisely what I’m working on” (Cross, 2016).

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