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Russia watches pyramid scheme teeter

By JEFF BERLINER

MOSCOW, July 30 -- Thousands of Russians who invested in a giant investment company that has turned out to be a pyramid scheme continued to mass over the weekend around the headquarters of the MMM company, which dropped its shares to less than 1 percent of their previous value and then suspended trading. The scandal has threatened to embroil the government, spill into the streets and into the political arena, and has jeopardized people's savings and dashed their get-rich-quick dreams that were fuelled by MMM's million-dollar advertising blitz. Blame is being dished out in all directions -- at the government, at capitalism, at lawmakers and at the company and its investors, though many who hold the virtually worthless MMM shares would rather shift responsibility away from themselves and the company that cannot redeem its shares. A government newspaper focused on where the state went wrong: 'We have got what we pressed for,' said a sarcastic editorial in Rosiiskaya Gazeta, 'a 'free market' -- free primarily from rules of the game.' The paper said 'a legal vacuum' precipitated the investment scandal and forestalled government action. A few lawmakers called for a special session to address the problem. A top privatization official watching the drama develop over the weekend asserted that the government would not and should not step in. 'Perhaps it sounds cruel to the investors affected by the MMM collapse, ' said Dmitry Vasiliev, deputy chairman of the State Property Committee, 'but we should realize that if the state compensates for their losses, it will do a lot of harm' to the market and 'ecourage all swindlers to follow suit.'

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MMM, which sets the value of its own shares in Russia's renegade world of primitive capitalism rather than letting market forces or stock exchanges do this, devalued it shares Friday to 950 rubles (less than 50 cents) from 125,000 rubles (more than $60) earlier in the week after adhering to a self-styled regime of boosting its share prices since putting shares on the market early this year for 1,600 rubles (then $1). Then, MMM suddenly halted all weekend trading, while seeking to mollify the crowd outside its headquarters with a statement promising to reopen as early as Monday and that share values would begin to climb again. While some shareholders, seeing the share-value plummet far below the value of the savings they plunked into countless shares, waited with bated breath to see what would happen, others started the gamble all over again by buying shares at the rock-bottom 950-ruble price -- until trading was halted. Anxiety has boiled over into anger as well as desperate threats by broken shareholders to set themselves ablaze. There have been brief street blockades, calls for shareholder action, urgent demands that MMM directors appear and appeals to the government, which, other than issuing warnings for people to steer clear of such schemes and slapping a 49.9 billion ruble ($25 million) tax liability fine on the company, has mostly watched nervously from the sidelines. An MMM official who emerged from company headquarters to soothe the crowd was cursed and retreated back inside while special police maintained order. A separate crowd gathered Saturday at the central Russian exchange, seeking to apply pressure to renew trading of MMM shares. Senior broker Sergei Azarov urged calm while saying, 'the situation with MMM must be dealt with at the government level.' Some hundreds of the thousands gathered at MMM were more interested in buying new MMM shares at deflated prices to start the risky gamble all over again in a move that could keep the pyramid propped up in renewed trading that could benefit those who get in early, while leaving late-comers empty-handed, like those maintaining a vigil outside company headquarters. MMM, which has no known money-making assets or investments, operated by using the earnings from new share sales to pay older shareholders impressive profits, and thus encourage ever more share purchases, in a classic pyramid that, thanks to slick advertising and its success at making big payoffs up to now, sucked millions of Russians into the scheme. There are estimates that 5 million Russians own MMM shares, making in the biggest investment company in Russia, but MMM Director Sergei Mavrodi boasts double that number in statements threatening to turn the wrath of his shareholders onto the government. Russia's main opposition daily, the former Communist Party mouthpiece Pravda, said Saturday that the government and MMM have the same interest in keeping the company afloat. 'If MMM collapse,' Pravda said, 'millions of Russians would turn away from the capitalist ideals which are being energetically implanted.' Pravda suggested Mavrodi wielded enough clout through his shareholders and their families, perhaps 40 million strong, and their collective wrath that, assuming he could redirect the anger away from his company and toward the government, he could become a substantial political force in Russia. Pravda also suggested that a government whose reforms had impoverished people had to bear the brunt of responsibility when those people turned to a new capitalist game like MMM for making money. But a commentator on Russian television described the mob of down- and-out investors outside MMM headquarters as a 'party of khalyavschiki,' or people who want to make money out of nothing, those who like a free lunch.

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Anxiety has boiled over into anger as well as deperate threats by broken shareholders to set themselves ablaze. There have been brief street blockades, calls for shareholder action, urgent demands that MMM directors appear and appeals to the government, which has mostly watched nervously from the sidelines, other than issuing warnings for people to steer clear of such schemes and slapping a 49.9 billion ruble ($25 million) tax liability fine on the company. An MMM official who emerged from company headquarters to soothe the crowd was cursed and retreated back inside while special OMON police maintained order. A separate crowd gathered Saturday at the central Russian exchange, seeking to apply pressure to renew trading of MMM shares. Senior broker Sergei Azarov urged calm while saying 'the situation with MMM must be dealt with at the government level.' Some hundreds of the thousands gathered at MMM were more interested in buying new MMM shares at deflated prices to start the risky gamble all over again in a move that could keep the pyramid propped up in renewed trading that could benefit those who get in early, while leaving late-comers empty-handed, like those maintaining a vigil outside company headquarters. MMM, which has no known money-making assets or investments, operated by using the earnings from new share sales to pay older shareholders impressive profits, and thus encourage ever more share purchases, in a classic pyramid that, thanks to slick advertising and its success at making big payoffs up to now, sucked millions of Russians into the scheme. There are estimates that 5 million Russians own MMM shares, making in the biggest investment company in Russia, but MMM Director Sergei Mavrodi boasts double that number in statements threatening to turn the wrath of his shareholders onto the government. Russia's main opposition daily, the former Communist Party mouthpiece Pravda, said Saturday that the government and MMM have the same interest in keeping the company afloat. 'If MMM collapse,' Pravda said, 'millions of Russians would turn away from the capitalist ideals which are being energetically implanted.' Pravda suggested Mavrodi wielded enough clout through his shareholders and their families, perhaps 40 million strong, and their collective wrath that, assuming he could redirect the anger away from his company and toward the government, he could become a substantial political force in Russia. Pravda also suggested that a government whose reforms had impoverished people had to bear the brunt of responsibility when those people turned to a new capitalist game like MMM for making money. But a commentator on Russian television described the mob of down- and-out investors outside MMM headquarters as a 'party of khalyavschiki,' or people who want to make money out of nothing, those who like a free lunch.

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