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Analysis & Opinion
11.01.11 Mavrodi’s Second Coming
By Tai Adelaja

Russia's top swindler Sergei Mavrodi, who masterminded the country’s most notorious pyramid scheme that bilked millions of Russians out of their life savings in the 1990s, said he would be back in business on Tuesday, with a new financial offering targeted at get-rich-quick investors. Mavrodi, a mathematician by training who was also one of the country’s first computer programmers, said he would harness the vast power of the Internet and spin money for potential investors by selling “fantiks” or virtual tickets.

Mavrodi's new project, MMM-2011, whose Russian acronym also translates as "We Can Do a Lot," is expected to be up and running on Tuesday, RIA Novosti reported, citing a video blog posted by the pyramid-schemer on Monday.

Under the new scheme, Mavrodi said investors would earn 20 percent profits per month while retirees and the disabled, his most loyal constituency, would get 30 percent. The project, which he also dubbed a "financial social network," will be "absolutely invulnerable, unsinkable and un-destroyable" and could attract up to 100,000 investors this year and up to 1 million in 2012. Unlike his old brainchild, which relied on aggressive soap opera-like TV and radio adverts to lure naive investors, Mavrodi said all investors have to do this time is open dollar accounts in electronic payment systems. "You all know my situation. I do not have the right to perform any transactions with any valuables – with any sorts of securities," Mavrodi said on his Web site. "All the operations will be carried out among the investors. I will not touch a thing. I have no right to do that. I will only be managing the process."

In the dying days of the Soviet Union, Mavrodi was one of hundreds of Russians who started small cooperatives that sold pirated videos and cassettes. In the late 1980s, he set up MMM with two partners but as his control on the market slipped, his company began selling “vouchers,” promising a 10 percent weekly return. He was arrested for tax evasion in 1994 but then elected to Parliament later that year by a groundswell of support from investors who regarded him as a victim of the corrupt Yeltsin era. But Parliament stripped Mavrodi of his immunity the following year and his 1996 bid to run for president was rejected by the Central Election Commission. He was added to Interpol’s wanted list in 1997 and immediately went into hiding. After four years on the run, Mavrodi was caught in a police raid in 2003 as he holed up in a shabby apartment near Moscow’s Frunzenskaya metro station.

In 2007, Mavrodi was sentenced to four and a half years in prison for fraud but spent less than a month in jail as he had been in detention since 2003. Mavrodi's defense lawyer, Olga Makarova, said then that the criminal case consisted of over 600 volumes and involved 10,366 plaintiffs from across Russia who lost 110 million rubles ($4.3 million), although millions of others lost money in the scheme. Despite his conviction however, Mavrodi continues to insist that he broke no laws and there are plenty of Russians willing to believe his narrative. “I don’t think that I committed a crime. I didn’t break any laws. And all this talk about a pyramid isn’t worth a bent penny,” Mavrodi said. “On the whole, I think I acted correctly and absolutely don’t regret anything.” Mavrodi was ordered to pay some 20 million rubles to compensate victims of the scam and in 2008, the courts released 18 million rubles belonging to the fraudster. However, at his release in 2007, he was met outside with a bouquet of lilacs from well-wishers.

Like Bernard "Bernie" Madoff after him, Mavrodi’s pyramid scheme ran deep in the family. Mavrodi's younger brother Vyacheslav was sentenced to five years and three months in prison in February 2003 for running his own pyramid scheme from 1996 to 97. Among other things, he was convicted on charges of illegal banking activity and illegally trading precious metals and gems. Sergei Mavrodi's wife, Yelena, was detained in 2001 on suspicion of trying to help a girlfriend kidnap a 6-week-old baby from a former lover. No charges were filed, and both women were released.

Mavrodi's cousin Oksana Pavlyuchenko was the head of Stockgeneration, a company that courted investors over the Internet with promises of 10 percent monthly interest, according to Wired magazine. The U.S. Securities and Exchange Commission took Stockgeneration to court in the early 2000s, accusing it of organizing a "classical financial pyramid" that has duped 275,000 investors, according to the SEC's Web site. The Mavrodi saga has been so captivating that film director, Eldar Salavatov decided last year to weave the biographical story of the bespectacled mathematician into a $2.5-million-budget action film called “PyraMMMid.”

However, Mavrodi’s MMM was just one of the largest of the hundreds of pyramid schemes that flourished in Russia in the early 1990s. One of them, Vlastilina, bilked millions of people and its head, Valentina Solovyova dropped out of sight before she was arrested in July 1995 by the Federal Security Service (FSB), and charged with fraud. Between 1993 and 1994, Solovyova, created the Vlastilina investment firm that prosecutors said took the ruble equivalent of $130 million from 16,500 people, ranging from poor pensioners to pop stars. Based in Podolsk, 60 kilometers south of Moscow, Vlastilina offered investors a 100 percent return on their money in one month. Investigators said Vlastilina worked as a pyramid scheme, in which high returns were paid out to earlier investors using money from new participants. Vlastilina also offered Zhiguli cars for half the market price within the same period. Some investors made a quick killing, but most lost their money when the firm collapsed overnight in November 1994. As the venture flourished, Solovyova gave some of the money away, paying for the education of her neighbor's children and even renovating a local church. When Solovyova was convicted of fraud in 1999 and sentenced to seven years in prison, the names of her victims were listed on 600 pages by the Moscow's regional Reutovo Municipal Court and two assistants took three days to read out the court’s decision.

As late as 2008, the Rubin Business Club, a St. Petersburg-based Ponzi scheme, also bilked thousands of investors out of billions of rubles and its director Alexander Polshchenko disappeared suddenly in February 2008, prompting the police to open an investigation into the fraud, dubbed the biggest in a decade. The Club’s clients had been encouraged to make a minimum investment of 3,000 rubles ($125) and court filings showed that many of the victims had taken out bank credit to finance their investment. The company Web site claimed its funds were invested in various construction projects in St. Petersburg. It also said the Rubin Business Club had signed contracts with various construction companies to transfer their funds to experienced brokers for investment in high-yielding securities.

But while similar scams had lured investors who were still new to capitalism and the concept of a stock market by promises of high returns, Mavrodi’s new undertaking is introducing a bit of high-tech into the bargain. Mavrodi said on his Web site Monday that he would once again introduce virtual tickets in a complicated scheme that he himself was at pains to explain. "They are like a unit of money – a ticket, a share, it is all the same. But these virtual tickets – these are not securities, they are little more than Monopoly money. They will rise in value." Experts say however that despite more awareness of Ponzi schemes in recent years, the country's low-level of financial literacy could still make it possible for fraudsters like Mavrodi to attract naive, get-rich-quick investors. About 25 percent of Russians said they would be willing to partake in such a scheme if launched, according to an express poll conducted by the Echo of Moscow radio station on Monday.

"Our financial laws are so vague that Mavrodi can try to pretend that he falls within the law,” Pavel Medvedev, a State Duma Deputy told the Echo of Moscow radio station on Monday. Medvedev, a financial ombudsman, vowed to stop Mavrodi in his tracks. “I will try to make sure that our prosecutors do not agree with that assessment," Medvedev said. "I am going to demand an inquiry."
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