Firm Offers Public Huge Returns, But Government Calls it Illegal
Investigation of MMM leaves investors desperate to redeem shares. RUSSIA'S NEW INVESTORS
FOR a country desperately in need of heroes, Sergei Mavrodi might just be Russia's new revolutionary superstar.Skip to next paragraph
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Last week, few Russians had ever heard of Mr. Mavrodi, president of the country's largest investment firm. But this week, after authorities alleged that his company, MMM, was illegally issuing unregistered securities and forced the firm to stop honoring its shares, Mavrodi was catapulted overnight into national stardom.
``We don't believe in the government, but we believe in MMM,'' says pensioner Emilia Alexandrovna, who has been on Mavrodi's side ever since she bought 200 shares with the company in April. The shares were worth the equivalent of about $1 several months ago; last week, they could be sold for as much as $50. ``We have inflation, and MMM has money,'' she says proudly.
MMM, which boasts five to 10 million shareholders, is the largest of Russia's new breed of investment firms, thanks to enormous promised dividends and a creative, aggressive television advertising campaign. But Russia's securities market is still in its infancy, and the myriad of investment scams promising up to 5,000 percent dividends could do irreparable damage to the country's shaky market economy. In June, such schemes were so prevalent that President Boris Yeltsin issued a decree to protect unwary investors from false advertising.
MMM's problems began in April, according to Russian press reports, when tax authorities approached Mavrodi asking him to divulge MMM's tax information. He refused, threatening that more pressure would force him to suspend the fund's activities. He warned it would be up to the government to deal with angry shareholders.
Last Thursday, the ``tax police,'' as they are called here, announced that MMM had failed to pay the equivalent of more than $24 million in taxes and fines. The next day, the Russian Finance Ministry issued a statement listing a number of investment firms, including MMM, which it said had illegally issued unregistered securities. According to government regulations, a firm must register with the Finance Ministry and provide it with complete information about its operations before it can legally issue shares.
By Saturday, thousands of investors, worried that MMM would soon be forced to close and eager to dump their shares, converged on the firm's offices. The panic, one of several in the last few months, quickly gained momentum.
By Monday, elite OMON riot troops toting semi-automatic rifles and wearing bullet-proof vests had been called in to MMM's central headquarters in southern Moscow. By Tuesday, the firm was no longer fully operational and all its other offices were shut.
A firm spokesman told the Segodnya newspaper yesterday that the shutdown was only temporary, blaming it on bank incompetence. But Russian news media reports have quoted MMM officials as privately saying that the firm is operating a ``pyramid'' scheme, in which phenomenal returns on investments come from the sale of more and more shares. When shares are not sold, the pyramid collapses.
MAVRODI, for his part, has loudly proclaimed MMM's innocence. Yesterday, he took out a full-page ad in many Moscow newspapers. In an open letter to shareholders, he blamed the Ministry of Finance, the State Monopoly Committee, and the State Tax Inspection for unfairly discriminating against him.
``In what concrete form will the robbed people's indignation take, and what will it lead to: to revolution, to civil war, or to something else?'' he asked in the letter. ``I personally cannot foretell.''
Russian officials weren't amused. ``It's absolutely inadmissible to bring politics to the securities market,'' Valentin Sergeyev, head of the government press service, told the Monitor. ``Of course, people's indignation and discontent will not make any government happy. But the Ministry of Finance is not very nervous about the situation.''
MMM shareholders, for their part, say politics are at fault. Some say the government wants MMM closed so more money will flow into state-owned savings banks. ``MMM is the only structure in Russia that isn't deceiving the people,'' a construction worker, Muhammed Madimedov, said as he waded through the thickly packed crowds yesterday. He said he didn't mind taking time off from work because he hadn't received wages for three months. ``The state gives us nothing, and MMM has guaranteed that we'll live,'' he said.
Sasha Shcherbakov, a 24-year-old student, bought his shares with borrowed money after his wife failed to receive her salary from a state-run leather factory for months running. ``I love MMM. I'm all for it,'' Mr. Sherbakov said. ``Our government deceived us for 70 years. If they decide to close MMM down, we'll be penniless.''