Russian Tax Police Raid MMM Office, Home of Its Chief : Finance: After collapsing last week, the investment fund accused of defrauding millions is still in business.

Search warrant in hand, Russian tax police came after the reclusive president of the country’s biggest investment fund Thursday in the Kremlin’s heaviest swipe yet at what it calls a colossal pyramid scheme that has deceived millions of novice capitalists.

Shares of MMM, which claims about 10 million investors, collapsed last Friday. But the company made an amazing comeback this week, launching a new round of seductive television advertisements and attracting a monthlong waiting list of would-be buyers of its new shares.

On Thursday evening, tax police, backed by camouflage-clad special forces in black ski masks, raided MMM’s central office and broke into President Sergei Mavrody’s apartment in central Moscow as well, catching him at home with his bodyguards.

“The government has declared war on us,” Mavrody told the Interfax news agency by telephone, minutes before police entered his eighth-floor apartment by clambering down two stories from the roof on ropes. He had refused to open the door to them.

It was unclear if Mavrody had been placed under arrest or only subjected to a search and then brought in for questioning.

What was clear was that the government was tired of MMM’s defiance. And it was worried that imitators of the firm will continue to proliferate, giving the fledgling Russian securities market--and capitalism in general--an indelibly bad name.

“This is only the beginning,” Dmitri Vasiliev, deputy head of Russian President Boris N. Yeltsin’s special commission on securities, said of the problems MMM has created. “If the approach is not changed, the scandals will multiply.”

The battle over MMM is mainly about money--possibly as much as $1 billion. But it has also turned political. Mavrody claims he has so much support from happy shareholders that the government dares not touch him; he has threatened to launch a referendum and warned Thursday that tangling with MMM could lead to civil war.

Vasiliev blamed the government’s awkward position on its failure to enforce the law and get tough with blatant violators of securities rules.

Although Russian tax police have said MMM owes at least $25 million in back levies, Thursday’s searches amounted to their first active attempt to bring charges. The Finance Ministry has come across as even more impotent; when it called Mavrody to a meeting on Wednesday, he failed to show.

Police said Thursday’s search was meant to determine how many shareholders MMM has and where its money has gone. If convicted of tax evasion, Mavrody could face up to five years in prison.

Until now, the government record on MMM has been one of puzzling tolerance. The company has blanketed the airwaves with promises of instant millions for months, but authorities made no move to ban the ads because of a lack of laws governing them. MMM also issued far more shares than it had license to, then reportedly told inspectors it had lost its register of shareholders, thus apparently managing to stymie them with the ease of a pupil who says his dog ate his homework.

MMM has never been audited, Vasiliev said--this despite government estimates it was pulling in $2 million a day on its shares. Only recently did top government officials begin to warn Russians that the firm was too good to be true and that they could lose all their money.

There has also been no proof of where MMM’s money has gone, although Mavrody claims it is all invested in solid companies including some defense firms.

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Perhaps even more surprising than officials’ passivity is shareholders’ willingness to believe in MMM--even after it cut share prices from $50 to about 50 cents last Friday.

“The government may do everything it can to stop MMM, but with 10 million shareholders, that is no easy task,” said Sergei Zaichik, a retired engineer who invested all he had, about $3,000, in MMM and is holding on to his shares. “We are a force to be reckoned with.”

In a deviation from usual market practice, MMM share prices were set by the company itself rather than by demand. For weeks, the firm provided investors with about 100% profit per month, apparently simply by using the usual pyramid method of paying off earlier investors with money from flocks of later ones.

When panic hit and people tried to pull out their money, Mavrody froze all trading, then dropped the share price so low no one would want to sell. He has promised that share prices will rise back to the $50 level in two months or so; his promises carry such weight that, brokers say, MMM shares in open trading were already up to about $4 on Thursday.

“Russia seems to be the most gullible country on the planet,” the Izvestia newspaper commented.

The government has announced it will not reimburse MMM investors for losses. Officials have said they cannot in good conscience use taxpayers’ money to compensate gamblers, even if they are poor. “Market economics means, above all, the personal responsibility of each person,” Deputy Finance Minister Andrei Kazmin told television viewers.

By contrast, in a populist move that smacks of the old Communist days, MMM has been buying shares back at the old high prices from investors who are deemed “especially needy”--mainly those who must pay for funerals and weddings. A standing commission now decides what cases are most worthy, and several hundred investors have reportedly gotten their money back.

And though MMM is suffering, dozens of other firms that offer basically the same kind of deal--and use the same hard-sell ads--are still flourishing, and investor interest does not seem likely to wane until firmer regulation is put in place.