After Krajbanka collapse, new Ponzi worries

  • 2012-06-13
  • From wire reports

TRUST ME: Sergei Mavrodi’s latest ponzi scheme has outsmarted the regulators.

RIGA - Sergei Mavrodi is one of the most infamous names in Russia’s recent history, when it comes to finance. In February, 1994, amid the turmoil of the country’s transition to a market economy, the mathematician organized a Ponzi scheme called MMM, reports Bloomberg. He offered returns of 100 percent a month and advertised aggressively on national television. Before the pyramid crashed in July 1994, it attracted as many as 10 million depositors, making it more popular than the voucher privatization program that was supposed to give regular Russians a chance to take a stake in formerly state-owned enterprises.

Mavrodi managed to avoid prison for nearly a decade, in part by getting elected as a parliamentary deputy and using the status to obtain immunity from prosecution. He ultimately served out a four-and-a-half-year sentence for fraud.
Now he’s back with his latest scam, but one with a twist. Last year, he announced the new project, MMM-2011, by stating boldly that it would be another Ponzi scheme. “Even if you strictly follow all instructions, you can still lose,” he wrote on a Web site describing the project.

He has scores of Russians buying into his new scheme despite the relative stability of the oil-powered economy, write AFP. So far authorities have been powerless to stop him.
Cheekily, his ads warn that “pyramids are dangerous for your financial health.”

Latvian regulators ignore warnings
A consulting office for the MMM-2011 scheme has been opened in the center of Riga, on busy Marijas Street near the central railroad station; a young man in the office is seeking new participants, reports LETA. That man, Maksims Lavrovs, said that the return on money “invested” in the scheme is 40 percent a month. The payout will be from new participant contributions coming into the scheme, he said.

The entire operation is done online, where legal tender is transformed into ‘Mavro currency,’ which is redistributed as new participants join the scheme. MMM-2011 accepts lats, euros or U.S. dollars, said Lavrovs.
Lavrovs is confident that the scheme will never run short of money. This is an international system that is constantly expanding, he explained. At the moment, more than 35 million people have put their money into the scheme. In Latvia, MMM 2011 already has about 10,000 clients.

Commenting on Mavrodi’s being found guilty of fraud, Lavrovs says this information is “all lies.” Russian authorities in the 1990s charged Mavrodi with fraud so everyone would believe that he was a swindler, while in reality all the money from the scheme was seized by the state and distributed among its entities, he says.
The staff in the MMM-2011 office in Riga said that the company has similar offices in at least four places in Riga. Lavrovs said that the scheme registers around 500 new participants every day. It is built on the principle of trust; however, the participants are not guaranteed anything.

“Soon everyone will be part of the scheme. But as the process has just begun, everyone is wary,” said Lavrovs.
MMM-2011 has no license to operate a business in Latvia; therefore, its operations are not controlled by official watchdogs. The official watchdogs - Latvia’s central bank and the Financial and Capital Market Commission (FCMC) - missed clear warning signs on another recently-collapsed financial instutition, Latvijas Krajbanka. Krajbanka was run by its owners in a similar way, as a Ponzi scheme.

Latvian regulators stand by helplessly
The MMM Ponzi scheme can be halted in Latvia with the help of civic society, FCMC deputy head Janis Brazovskis said in an interview with the daily Neatkariga in March. Brazovskis is urging people not to get involved in the scheme.
“I call on people to stay away from this Ponzi scheme, because this organization has no right to accept deposits and investments in Latvia. Unlicensed businessmen and companies are not monitored by the state, and depositors’ interests are therefore not protected. We have reported the activity of MMM-2011 to the State Police,” says Brazovskis.
The authorities are supposedly taking efforts to find a way to prevent such schemes from legalization in Latvia. Commenting on the possible need to adopt a special law against Ponzi schemes in Latvia, Brazovskis explained that much can be achieved within the framework of the existing laws and regulations, or maybe some amendments could be drawn up.

Lithuanian law enforcement agencies, instead of endless talk, have moved ahead and halted the MMM-2011 scheme operations after finding that its activities violate the law.
The Lithuanian General Prosecutor’s Office has been collecting evidence since March, after a request from the Bank of Lithuania, and several people were arrested on June 4, attorney Zenonas Burokas told a news conference.
Police detained five people accused of fraud, illegally acquired property and of financial pyramid establishment, and arrested all property which may cover client losses. The investigators determined that MMM-2011 obtained 1.5 million litas (434,700 euros) from Lithuanian client deposits.

Seeds of self-destruction
MMM-2011 halted payments on May 31. “Unfortunately, I have to admit that a panic has started within the System,” Mavrodi wrote, blaming the media for spreading malicious rumors. “This is a pyramid! If everyone rushes to withdraw the money, there is no way there will be enough money for everybody. In fact, it would be the same with any bank.”
Undaunted, Mavrodi launched a new pyramid, MMM-2012, saying that it would be used to prop up MMM-2011. “Don’t worry, don’t be nervous, we will fix everything, and you’ll get paid in full,” Mavrodi wrote, adding immediately: “This is not a promise, just a feeling I have.”