Russian tax police drop in on MMM

RUSSIAN tax police arrested Sergei Mavrodi, mastermind of the MMM pyramid scheme, at his flat in Moscow yesterday after climbing down ropes fixed to the roof of the building and smashing their way in through his glassed-in balcony.

'It was very impressive,' said the laconic Mr Mavrodi, before he was led away by armed police. He had denied them access through his reinforced front door.

As the officers, with a warrant from the Moscow City prosecutor, began searching the flat at 41 Komsomolsky Prospekt, Mr Mavrodi froze the operations of his MMM investment fund, which saw one pyramid effectively collapse last week when share prices plunged, but which launched a new issue of unregistered shares this week.

Mr Mavrodi, who spoke to the press by telephone, said he had done nothing wrong and accused the government of declaring war on him.

The dramatic police operation became necessary after Mr Mavrodi, listed as Russia's fifth-richest man, failed to turn up to a meeting with Finance Ministry and tax officials on Wednesday.

The tax inspectors, backed up by Omon special-police units, were polite at first, informing Mr Mavrodi through the door-phone that the prosecutor had opened a criminal case against him and demanding to be let in.

MMM has been taking an arrogant attitude with the authorities because it knows Russia does not yet have a law against pyramid schemes. But there is a law against not paying tax.

The police search warrant said the fund owed the state pounds 8m. Inspector Vyacheslav Pankin said Mr Mavrodi could be jailed for up to five years if convicted.

The MMM president denied tax evasion. 'This is just a pretext,' he said. 'If they had not found this one, they would have found another. The authorities know perfectly well they cannot act legally against me and that is why they have launched this provocation.'

MMM inflated a giant bubble by persuading Russians, some poor and naive and some conscious gamblers, that they could get rich quickly if they bought shares like Lyonya Golubkov, the hero of a series of misleading television advertisements.

What the fund did not explain was that it was making no proper investments but simply paying out dividends with money from new share purchases, like a mad dog eating its own tail.

The government has admitted it should have done more to warn the public, brought up in the sheltered atmosphere of Communism and unused to the ways of the free market, but it says it cannot afford to compensate investors.

Dmitry Budakov, of the Central Bank, said yesterday that MMM shares were 'tickets, not securities. People who bought them might as well have bought picture postcards or labels'.

Many investors initially refused to believe the financial experts and remained fiercely loyal to Mr Mavrodi. But there were signs his popularity might be fading. At MMM headquarters, staff spent hours yesterday searching for a bomb which was supposed to have been planted, but it turned out to be a hoax.