A New Generation, A New Fiddle — The Rise and Imminent Fall of MMM

About six months ago, I was engaged in a discussion with a childhood friend who occasionally asks me for investment advice. After discussing my view on the near term outlook of the exchange rate, he cunningly asked for my opinion about an investment scheme currently making the rounds. “By the way” he said, “have you heard about MMM”? I responded that I had not and that the name did not sound like that of a credible organization. Certainly, I would not name any business of mine MMM, but then that is me. He chuckled and urged me to look up the investment scheme and give my thoughts as soon as possible. When he spoke about MMM, the enthusiasm in his voice was infectious; as he walked away, he had a spring in his steps and was smiling to himself like someone who had discovered a hidden gem.

I went online to read about MMM and came across a plethora of materials and discussions. Many people had invested in the scheme and many more people were investing or considering investing in the scheme. As I continued reading, I identified several fundamental flaws in the investment scheme and it made me wonder why the scheme had caught on as much as it did. Afterwards, I called my friend to discuss my findings and tried to convince him not to invest in the scheme because I believed there was no business case to sustain the model.

Fast forward to today; boy, I was wrong! MMM is not only still existing in Nigeria, it has thrived and its network has grown significantly. Scores of people have made money from the scheme and many more are making money daily. There is hardly a day that passes by that I am not invited to join MMM from various social media platforms. Some even say the website now has more daily views than Facebook — I wonder how accurate that is. There are several seminars and trainings on MMM and an unconfirmed source indicated that a church held a session for its congregation on how to make money from MMM. A Nigerian version named NNN is also gaining grounds. Even traditionally “risk averse” investors have joined the bandwagon. Someone on social media once likened MMM to Donald Trump — many people denounce it in public but are heavily invested in private. Another commentator said that MMM is the only scheme that someone will send you twenty reasons why you should not invest in the morning but the same person will come back in the evening with a full page of reasons why you should invest in it. MMM’s network cuts across age groups, educational backgrounds and professions. I called it a scam a few months ago but my assessment appears to have been wrong — it does not look like it will fail, at least not anytime soon.

For those who do not know about MMM (highly unlikely that you have not heard about it except you live under a rock where the gospel of MMM is yet to reach), permit me to provide a brief background. MMM is an online platform that thrives on the logic of giving and receiving help. It allows a user render help to people (similar to giving a loan) with the promise of repaying the principal plus a 30% interest in a month. Whilst the platform has a few other intricacies, the idea is basically about giving and receiving help at an attractive rate. The scheme was developed by a Russian billionaire, Sergei Mavrodi who was jailed having caused turmoil in the financial system of his home country some two decades ago. Many people went bankrupt and a few committed suicide after his “overnight make me rich scheme” went bust. Mavrodi declared MMM bankrupt on December 22, 1997, subsequently disappeared, and was on the run until his arrest in 2003. In 2007, Sergei Mavrodi was found guilty in a Russian court of defrauding millions of investors of 110 million rubles ($4.3 million). Over the years, Sergei Mavrodi has modified the scheme and has introduced it to several countries around the globe — particularly emerging and frontier markets (including our dear own Nigeria).

Whilst it is easy to conclude that this “newly revamped scheme” will fail like its predecessor, it is only fair to carefully consider the business case of the scheme and objectively assess its viability before jumping to any conclusions. Many people have classified MMM as a Ponzi schemes but is it really one? According to Wikipedia, a Ponzi scheme is a fraudulent investment operation, where the operator pays returns to its investors from new capital paid to the operator by new investors, rather than from profit earned through legitimate sources. Going by this definition, I am of the opinion that MMM is a Ponzi scheme and several people I have discussed with also agree with me — the irony is that they are still heavily invested in the scheme.

I was an average student in Secondary School (“average” might even have flattered me) but whenever I think about the MMM, it reminds me of a concept in my mathematics and physics classes. Although I do not recall the topic, the concept remains clear in my head. The concept depicts how long it will take for a tank to become empty assuming that water flows into it from the top at a specified rate (say 100m3/s) and simultaneously flows out through a wider tap at a faster rate (say 130m3/s).

Model not sustainable.

Without going into the calculations involved, the bottom line is that although it will be difficult to estimate how long it will take for the tank to become empty, the tank will definitely become empty one day. Better put, the outlet will not continuously run at the earlier specified rate (130m3/s) forever. The difference between the rate at which water flows in and the rate at which water flows out will determine how fast it will take the tank to get to this state. Suffice to say, MMM will go bust one day, the question is when? Furthermore, the business model is not sustainable. I kept trying to figure out whether MMM invests in businesses that generates returns. If otherwise, where does the 30% interest that the scheme pays come from? According to the theory of “Zero-sum game” — one person’s gain is a loss to another. This means that someone must pay for the free lunch — if not you, then those coming after you. Have you taken time to ask yourself “What is in this for Mr. Sergei Mavrodi of MMM”? “How do the operators make their money”? “What is the value being created that generates the extra interest being paid”? There are clearly more questions than answers.

Given this realization, the question on my mind was “why are people still investing in this scheme”? The answer is not farfetched; the return on Investment is very attractive and may overshadow the risk for desperate and quick-money seeking investors. Also, the “it will not happen to me” mentality keeps people believing that the imminent collapse would not happen while they are invested in it. In spite of the uncertainties surrounding this investment scheme, many people still invest in it. In case you do not understand why, I do — investors’ actions are sometimes driven by greed — the promised returns sometimes overshadow the logical analysis of the risk involved. As a Chartered Accountant and a CFA charterholder, I spend my day seeking value adding investments for my clients. Whilst high return is important to my investment decision, the investment risk is just as important. Do you know that even if you agree to pay a bank an annual interest rate of 100%, the bank might still not grant you the loan? There are some friends and acquaintances whom you will never lend money even if they promise to pay double the amount in a few days. This is because high return is never the most important consideration in making an investment decision, investors seek high risk-adjusted return (i.e., your return after taking into consideration the risk you are taking). Many clients will trade-off “high return” for “lower risk”; particularly as “return of capital” becomes more valuable than “return on capital”.

The Security and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) have issued a scam alert on MMM and the House of Representatives has constituted a “Committee” to investigate the scheme. Whilst we await the outcome of their investigation, we should remind ourselves about some basic tenets of investing — is it sustainable? Sustainability is not about if someone has made money from it, it is about if people will continue to make money from it. A scheme that gives you money without receiving any value in return is a scam. Lastly, why will someone pay you 30% monthly for investing? This is equivalent to 360% annually (simple interest) and 2230% annually with compounding interest — this is ridiculous and unsustainable.

As a financial analyst who is concerned about the integrity and development of our financial market, I write to discourage you from investing in MMM by enlightening you about the risks involved. This write up is not for those who are well informed, neither is it for those who understand the risk associated with their decisions. It is for the few who believe they have found a genuine investment opportunity in this tough economic environment, for those who have been misled to believe that MMM is a gold mine that can be harnessed by savvy entrepreneurs, for the few who have listened to countless messages extolling the investment and savings culture and who see this as an opportunity to join the ranks of those saving for the rainy days. This message is for the few who genuinely cannot spot the flaws in the business model of MMM.

Even if the past is not a perfect predictor of the future, it remains a good guide. Remember that all earlier Ponzi schemes have failed — Nospecto and the popular Wonder Bank schemes happened in the not so distant past. They once seemed like the real deal and many people made money from them. They spread like wild fire but went out with a great bang. When these schemes fail, they do so spectacularly, the attendant losses are much greater than the gains and the longer they last, the deeper the holes they create. I have no doubt that people have made money and more will still make money from MMM. However, I am certain that many more people will lose a greater amount to the scheme. The loss in Russia was $4.3 million (N1.4 billion), for some their savings, others their houses and for a few their lives. These are hard times, we should make sound choices. Regardless of the magnitude, the losses will come and the longer MMM is around, the higher the losses will be.

Ultimately, MMM will fail — the only uncertainty is “WHEN”.

Olalekan Olabode, CFA

The longer MMM is around for, the higher the losses will be
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