Operators of high investment yielding scheme, MMM have in the last few days come under significant pressures from the media, social media and even Legislators. This is also coming on the heels of several allegations which suggest that the scheme bares all the hallmark of a Ponzi and could indeed be one.

As expected, the operators of the scheme are fighting back. They have also put out their own propaganda machine which they hope will convince those looking to join to do so without a bother. They have even gone as far as claiming that it has been approved by the CBN.

The operators of the scheme are not alone at this. “Investors” (sorry, we’ll have to use that word) in the scheme are also doggedly defending the scheme and are not afraid to attack anyone who dares calls it a ponzi or predicts its well…. inevitable fall. Their defensive posture is unprecedented as typically ponzi scheme operators hardly get heard let alone institute a propaganda machine. A mathematical theory proposed by Mike McDougall, CEO of the Actuarial Society of South Africa could explain why MMM operators are in a frenzy.

Here is how he described MMM and why it is destined to fail

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“It can be stated with absolute certainty that these schemes will eventually collapse, leaving many people financially destitute, while only the founders and a few early participants make considerable gains,” he said.

“There are essentially two reasons for this. Firstly, if a scheme is paying out more than is being earned, it will run out of money. Secondly, such schemes need continuing growth in new members to sustain payments to existing members, and the reality is that they will ultimately run out of new investors,” he said.

“The only uncertainty is when the collapse will happen, which depends on how quickly the fund is growing and how much bigger the declared yields are than the actual investment earnings on the funds invested.”

South African website, Fin 24 also puts it into better perspective.

Example of scheme

To demonstrate, McDougall points to the simple example of a scheme that begins with 100 members who each invest R1 000 with a promised return of 30% per month. Every month 100 additional members join the scheme and each invests the same amount until the scheme collapses. Members receive their first payment the month after they make their investment.

In this example, the scheme begins with 100 members and total funds of R100 000. In the second month, there are 200 members and the fund closes with R170 000 after paying dividends of R30 000 to the founding members.

The total dividends paid rapidly escalate each month as the membership base increases, until the scheme reaches its seventh month. In its seventh month, the scheme begins with R70 000 and receives an additional R100 000 from new investors. However, the scheme must now pay total dividends of R210 000 to its numerous members, leaving it in debt of R40 000. Instead of R300 each investor only gets R243 and the scheme collapses.

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The above table probably explains why MMM fans, investors and operators are pushing back. The scheme requires more people to join for them to be able to continue to share money at these exorbitant interest rates, of course without creating value. The Investors column in the table above needs to increase in numbers and go beyond 7 months (or indeed infinite) to sustain the payouts. We all know nothing is infinite, especially with high yielding investments. It should plateau at some point.

Another reason too is the fact that most of the investors need to wait a few more days or weeks to get their money out, so the more bad publicity the scheme gets, the higher the risk of not being able to pull their money out.

It doesn’t end there too. A common feature of MMM is that most of the investors are returnee investors, that is those who have invested before and then decide to reinvest the profits. These guys make up a significant portion of the scheme and could decide not to reinvest thus jeopardizing the very survival of the scheme. What about those who just joined? Well the first in first out approach applies here. They’ll have to wait a bit longer to get their money our. But with the air of negativity around the scheme ratcheting up, there might be no new investors from where they can get money to pay them from.

This all doesn’t bode well for the operators of the scheme who really need to attract newer recruits and hope that older recruits continue to have faith in the scheme. Now that the EFCC and NASS is getting involved, a simple instruction to shut down the website of the operators could be all it will take for the cookie to crumble.

We do not wish for people to loose their hard earned money and hope that somehow this all ends well. For now, all we can say is best of luck.