• The Russian Madoff

    Author : White Collar Firm January 8, 2015

    Bernie Madoff operated the most extensive and perhaps the most well-known Ponzi scheme in history. However, while almost synonymous with his crimes, he is far from the only one to pull off such a con.

    In Russia, Sergei Mavrodi has run three different Ponzi schemes from 1988 to the present. In all, the extent of his fraud remains unknown; however, some put the figure as high as $10 billion. Despite defrauding possibly millions of investors, Mavrodi avoided capture for over a decade after starting his scheme. Finally arrested in 2003, Mavrodi was released in 2007, and barely missing a beat launched yet another Ponzi scheme. While Madoff’s scheme remains the largest and most well-known in recent history, Mavrodi’s case is every bit as fascinating and polarizing.

    In 1988 Mavrodi founded a seeming innocuous equipment business, MMM, in the then-Soviet Union. However, in 1992, MMM was accused of tax evasion, and as Mavrodi struggled to keep the company afloat, he transformed it into a Ponzi scheme beginning in 1993. The company quickly attracted investors by using an aggressive marketing campaign and by promising staggering annual returns of as much as 1000%. At its height, the company was taking in so much money, it could not be counted.

    In July 1994, MMM was officially charged with tax evasion and the company was subsequently shut down. MMM owed investors the equivalent of between $50 million and $1.5 billion. Compared to that, Madoff defrauded his investors of an estimated $65 billion. In August 1994, Mavrodi himself was arrested for tax evasion. However, Mavrodi blamed the investors’ losses on the Russian government, and by promising his defrauded investors a reimbursement program, he was elected to the State Duma, Russia’s representative assembly.

    In 1996, Mavrodi made an attempt to run for Russian President; however, the government rejected his application. MMM finally went bankrupt in 1997, and Mavrodi went into hiding.

    While in hiding from the Russian police and Interpol, Mavrodi and his associates launched a new Ponzi scheme called Stock Generation. Stock Generation was run from the Commonwealth of Dominican island nation in the Caribbean, and attempted to skirt enforcement from the United States Securities and Exchange Commission (SEC) by claiming it was a gambling website.

    Unlike MMM, however, Stock Generation was entirely a virtual stock market game. It promised returns as high as 150% a month and remained in operation for over two years. Once again Mavrodi’s scheme defrauded millions of investors, of hundreds of millions of dollars.

    In the year 2000 the SEC attempted to file injunctions against Stock Generation in Massachusetts District Court. However, this court found in favor of Stock Generation; later, this decision was reversed on appeal, leading to the complete shutdown of the site. Mavrodi was finally arrested by the Russian police in 2003 and investigated for tax evasion and tax fraud. Eventually found guilty of fraud, he was sentenced to just four years in prison. He was released in 2007.

    In January 2011 Mavrodi started MMM-2011, a scheme which asked investors to buy Mavros, a form of virtual currency. Depending on which type of Mavro was purchased, an investor’s money grew at a specified value, sometimes as high as 60%month. However, like every Ponzi scheme devised, this individual growth was illusory: All the money was in fact shared among all the other investors - a financial pyramid, with all invested money at high risk.

    MMM-2011 is currently still running and has claimed as many as 30 million investors. Although the extent of Mavrodi’s fraud remains speculative, its sheer scale and longevity rivals even Madoff’s Ponzi scheme.

Leave a Reply

Your email address will not be published. Required fields are marked *

five × 5 =