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Russian Investors Get Burned

Collapse of MMM investment firm's get-rich-quick scheme - offering a ruble return of nearly 100-fold every six months - is a cautionary tale for unseasoned investors

By Wendy SloaneSpecial to The Christian Science Monitor / August 11, 1994



MOSCOW

LYONYA Golubkov, Russian television's popular boy-next-door, who stars in a series of commercials advertising MMM stock, may embark on a new career just two weeks after the country's largest investment firm collapsed.

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In a planned ``folk musical,'' the fictitious Lyonya manages to unload all MMM shares right before the firm shuts down and to emigrate abroad with his neighbor, Maria Sergeyevna, the Komsomolskaya Pravda daily reported yesterday.

Commercials starring Lyonya, which are still broadcast despite being banned from Moscow airwaves, show the diminutive everyman promising elaborate gifts to his wife, Rita. In one commercial, he travels to see the World Cup in the United States - thanks to his MMM dividends.

But in real life, the millions of investors who plunged money into MMM shares were not that foresightful. Some unsuspecting investors, many of whom had never before invested in the stock market, lost their life savings to the get-rich-quick scheme, which offered a ruble return of nearly 100-fold every six months.

The scandal is the worst yet in Russia's fledgling shares market. But analysts say it should have no long-term negative effects on Russia's securities market.

The collapse, which followed the demise of several smaller funds, will instead make unsuspecting Russians think twice about where they put their money, these analysts say.

``MMM shares do not represent the serious stock market. It is just play, just gambling,'' says Mikhail Alexandrov of Alpha Capital investment company.

``If you lose money in Las Vegas, it doesn't mean the stock market in New York collapses, even if you lose a lot,'' he says. ``I know personally a guy who won about $1 million on MMM. He's not complaining, obviously.''

MMM president Sergei Mavrodi, whom many investors still see as their savior, is in jail following the firm's collapse. Authorities have likened the investment to a ``pyramid'' scheme where dividends are paid out as cash is received from newer deposits.

Mr. Mavrodi's troubles began two weeks ago, when he was accused of owing the equivalent of more than $24 million in taxes and fines. MMM shares have plummeted 99 percent in face value since July, although the scheme has not been declared illegal.

Last week, MMM shut its doors to protest Mavrodi's arrest on tax-evasion charges connected to another of his companies, Invest Consulting. Later, tax officials broadened their investigation to include 49 smaller Mavrodi-run businesses, which they say are part of a shell game to buy and sell MMM shares and bid up the price.

On Monday, tax police said MMM could reopen, although they seized about 1 billion rubles from its headquarters over the weekend and said they would keep Mavrodi in detention another week.

``People were perfectly aware that MMM was not a honest company. Their motive was that they thought they could withdraw money before it collapsed,'' says Sergei Barsov of Adamant, a firm that manages assets for investment funds. ``Some blame the government, others blame MMM, but a considerable portion of people blame themselves and congratulate Mr. Mavrodi for his capabilities.''

Meanwhile, members of MMM's unofficial Shareholders' Union have protested what they call a governmental ``economic war'' against them by staging sit-ins on Red Square and outside MMM headquarters. Thirteen shareholders have staged hunger strikes to demand Mavrodi's release.

``Mavrodi: From President of MMM to President of Russia,'' read one placard held by a protester. ``Hands off Mavrodi,'' read another.

``People have been able to buy things they need thanks to MMM, like good furniture and refrigerators,'' explains MMM supporter Valery Sidirov. ``People now are just scared because of the lies the government has been telling us.''

Analysts say MMM's collapse has caused no sharp drop in securities, although interest in them has weakened. The Central Russian Universal Exchange sold about 3,500 shares on Tuesday, with prices only slightly down from Saturday, Interfax reported.

But a broker at the Russian Commodities and Raw Materials Exchange said the average size of share lots fell to between 50 and 100 shares after Mavrodi's arrest, as compared with previous lots of 2,000 or more, according to Interfax.

Alexei Pupunin, spokesman for the non-governmental Shareholder's Rights Committee, says the long-term future of the country's securities market depends on the state, which has refused to bail MMM out.

``If it pays out, investors will not take the collapse too seriously,'' he says. ``If it doesn't pay, it will force people to think before they invest.''

Meanwhile, the Russian news media is taking pains to assure shareholders that their country is not the only one plagued by such scams.

``Lyonya Golubkov on the Incas's Trail,'' read a headline in Wednesday's Rossiisskiye Vesti newspaper, recounting a similar failed pyramid scheme in Peru.