Rouble trouble: Naive Russian investors have had their fingers badly burnt by the collapse of MMM, a fund that promised instant riches. Helen Womack considers the scandal and its possible long- term effects

THE FUNERAL of Lyonya Golubkov said it all. Scores of Russians who had been duped into buying shares in the MMM investment fund gathered near Moscow's Pushkin Square to burn a cardboard coffin bearing the name of the fictional character from the television commercials who had led them to believe they could get rich quick. But at the last minute, and in a very Russian way, their anger turned to maudlin affection and they decided to hold a wake for him instead.

The Beer Lovers' Party provided the drinks and they saw Lyonya off in style. He had been a decent chap, buying his wife a fur coat and a flat in Paris out of the proceeds of his MMM shares. If only the government of President Boris Yeltsin had not interfered, the game could have continued and everyone could have enjoyed the good life like Lyonya.

The investors had had their fingers badly burnt in post-communist Russia's biggest financial scandal, and still they did not understand what had really happened. They did not know what to think about it, who to blame.

Belatedly, the Russian authorities have decided precisely what attitude to take towards Sergei Mavrodi, the financial wizard behind what the press has been calling the MMM pyramid scheme. Last Monday, Mr Mavrodi was officially charged with large-scale tax evasion and resisting arrest and transferred from police custody to the Sailor's Rest Prison - famous for holding the 1991 coup plotters - to await trial. He faces up to seven years in jail if convicted on both charges.

Meanwhile, Central Bank officials are drawing up a draft law on the future regulation of the securities market, which parliamentary deputies will find on the top of their in-trays when they come back to Moscow after the summer recess.

Technically speaking, Mr Mavrodi was running not a pyramid but a Ponzi scam, named after swindler Charles Ponzi, who raised nearly dollars 15m ( pounds 9.5m) from 40,000 investors by promising to double their money in 90 days. He used money from new investors to pay off earlier investors. His name has since become synonymous with this kind of fraud.

Such schemes have cropped up all over eastern Europe in the chaos following the collapse of communism. Russian finance ministry officials say that, quite simply, MMM was paying dividends to old shareholders out of money coming in from new investors.

Night after night, the slick adverts went out on television, attracting more and more people to put their money into MMM, with promises of totally unrealistic interest rates. The wild promises should have rung alarm bells for viewers but they did not. Russians, bombarded for years by communist propaganda, are used to thinking that anything they see on television has official approval and so Mr Yeltsin's warning, a few weeks before MMM finally collapsed, that the commercials were misleading had little impact.

In any case, the dream offered by Lyonya was much more attractive than the dull lecture given by a president who is no longer popular. One commercial showed the cheeky Lyonya - the archetypal ordinary bloke - enjoying himself on a beach in California. Another - especially below the belt - suggested that Victoria Ruffo, the star of the Mexican soap opera Simply Maria, which is opium for millions of poor Russians, endorsed MMM. Ms Ruffo is reported to be considering suing.

Many of MMM's investors, estimated at between five and ten million people, swallowed these adverts hook, line and sinker. People like pensioner Natalia Mikhailovna, for example. She had saved before with Sberbank, the state savings bank, but had come to mistrust that organisation after the government twice withdrew certain rouble denomination notes from circulation and allowed citizens to change only a small amount of money into new notes while the rest of their savings had to stay, at most disadvantageous interest rates, at Sberbank while inflation raged outside.

Ms Mikhailovna is not wealthy enough to send her money abroad, the (illegal) savings option favoured by super-rich Russians and others lucky enough to get their hands on hard foreign currency. Neither, at her time of life, does she want to put her money into consumer durables as a younger Russian might do. (Cars are a good investment since, because demand still outstrips supply, second-hand vehicles keep their value.) So for the old lady, worrying about such matters as how to pay for her funeral when the time comes, MMM seemed a reliable investment. She bought shares worth two million roubles ( pounds 650).

When MMM crashed at the end of last month, Ms Mikhailovna became hysterical and threatened to commit suicide, according to her nephew who is now looking after her.

Other investors were, of course, much more cynical than Ms Mikhailovna. They knew they were gambling and that they could only win at the expense of their fellows but they believed they were smart enough to judge the moment when to get out of the game. Some did, indeed, judge nicely and made small fortunes by doing nothing more strenuous than standing in line outside MMM offices, which until shortly before the end were buying back shares at ever increasing rates. But the majority of the gamblers, like the innocents, were caught out and ended up financing the few lucky, clever or well- connected ones who bought shares at the very beginning.

The bubble burst on 29 July when, after government warnings had eroded confidence, the MMM share price plunged to 1,000 roubles (33p) from a high of 115,000 roubles a few days earlier. Prime Minister Viktor Chernomyrdin expressed his sympathy but said the state was unable to compensate investors for their losses.

The scenes of pandemonium outside MMM headquarters on Warsaw Avenue provided colourful copy for reporters but strangely the screens of Reuters barely reacted, for this was a human interest story of little concern to professional financial people or foreign companies trading with Russia.

MMM was not immediately closed down and even managed to come out with a new share issue for which, astonishingly, there was lively demand. This was possible because Russia does not have laws against Ponzi schemes as such. But it does have some rules about how shares should be issued as well as laws against tax dodging. The authorities decided to use the latter against Mr Mavrodi.

He was given a chance to go to the finance ministry to discuss his problems but decided to ignore the invitation and stay locked behind the metal door of his flat at number 41 Komsomolsky Prospekt. So the tax police paid him a James Bond-style visit, dangling down ropes attached to the roof of the building and smashing in through his balcony to detain both him and his brother Vyacheslav. The brother was later released.

After the raid, some journalists managed to have a quick look round the flat in one of the Stalin-era blocks characteristic of Moscow. Mr Mavrodi was recently listed as Russia's fifth richest man but you would not have known it from looking at the flat. A reporter from the Moscow Times said there was a satellite dish which must have been worth about dollars 60,000 ( pounds 39,000). But otherwise the apartment was shabby and bare except for Mr Mavrodi's extraordinary collection of dried insects and butterflies. There was even a stuffed bat hanging on the wall.

The yard outside was a different matter, however. Here, several Western limousines were parked. Evidently Mr Mavrodi, like the late Soviet leader Leonid Brezhnev, collected cars. Automobiles were his passion. That was what he spent his money on.

So it must have been rather a comedown for him to be driven off into custody in one of the old bangers with crackly radio with which the badly equipped Russian police must fight their battle with the increasingly powerful mafia. Mr Mavrodi, reported to be recently married, spent his 39th birthday in the cells while the newly formed MMM Shareholders' Union demonstrated for his release, the Beer Lovers' Party tried to send liquid refreshment in for him and old ladies who could ill afford it offered up string bags of food. The short, pudgy MMM boss claimed to be on a hunger strike but the police said that he just did not like prison meals.

The Russian authorities have twice before pursued Mr Mavrodi for tax evasion, but in 1992 and 1993 they had to drop the charges for lack of evidence. This time they believe they can get a conviction.

The charges relate not to the Ponzi scheme, or AO MMM, to give the investment fund its full name, but rather to another small company in the MMM empire, a securities consulting agency called Invest Consulting. Mikhail Andreyev, the first deputy head of the Moscow police investigation department, said Mr Mavrodi was accused of failing to report 24.5bn roubles in company revenue to the tax authorities. Lawyers for Mr Mavrodi say the money was merely on loan to Invest Consulting and has now been paid back to the creditors.

The full details of Mr Mavrodi's activities will emerge only at the trial, but already it is clear he was running a Byzantine empire encompassing dozens of little companies with jokey names like Butterfly and Jasper. A mathematician, Mr Mavrodi got into business at the end of the 1980s by setting up a network of co- operatives to import computers. His associates say he was interested in making fast money but not in developing his companies.

Thus, by 1991 he had walked away from the computer co-operatives and set up 10 new businesses named after letters of the Greek alphabet. Then in 1993 he registered nine more named after jewels, such as Diamond, Sapphire and Jasper. According to Alexander Borisov of the tax police, some of these little companies bought up AO MMM shares and thus inflated their price.

One of the biggest mysteries is why the government allowed the MMM scandal to go on for so many weeks and only towards the end issued feeble warnings to the public. At a press conference, officials from the Committee on Equities said that, even without a specific law against Ponzi schemes, the finance ministry could have done much more to control the situation. It could, for example, have insisted that AO MMM follow the existing rules and publish a list of its shareholders. It could have checked to see if AO MMM was selling more than the 991,000 shares it was licensed to sell. It could have had a look to see where AO MMM was depositing the enormous amounts of cash that were flowing in.

Some Russians say darkly that Mr Mavrodi could not have got as far as he did without powerful mafia cover, perhaps from people in the government itself. And now that the scandal has broken and hit the front pages of newspapers all over the world, Mr Mavrodi is suggesting those forces are out to silence him. Last week his lawyer Eduard Safronsky said: 'The investigators are being manipulated like puppets. There is no way they could make such mistakes (in their investigation) without presssure from other structures.'

As likely as the conspiracy theory is the possibility that government officials were simply lax and complacent, but they mean to be tougher in future. The deputy finance minister, Sergei Alexashenko, said last week decrees would soon be coming in making it much more difficult for people to operate Ponzi schemes. For example, companies would be forbidden from quoting their own stocks and would be limited in the number of shares they could issue. They would also have to make quarterly reports of their activities to the finance ministry.

Mr Yeltsin says the MMM affair has been a good lesson for the Russian people and they will be more careful how they invest their money in future. Perhaps he is right. Certainly there has been none of the violent social unrest that some pundits predicted when AO MMM crashed. The violence has been minimal. On the day of the crash windows were broken at the Royal Materials and Commodities Exchange, where MMM shares were traded. Outside the MMM headquarters the crowds were so big they created traffic jams and scuffles broke out.

But the long-term consequences are hard to guess. For millions of people, the whole capitalist system may have been discredited through this one bad experience, and a nostalgia for the Soviet way of doing things may well make itself felt at the presidential elections, which are due in 1996.

(Photograph omitted)