The show was a Mafia laundering scheme.
Internet detectives have uncovered some interesting details about the man who owned the company responsible for this nightmare: Robert D. Genova. Genova had previously been an official suspect in the murder of a former business partner, who worked in the Adult Film industry; police also suspected Genova of having Mafia connections. Discussed further in this forum
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The puppets are sewn from human skin.
This could easily go along with the above Mafia theory. However, it could just as easily be some twisted cult, or a lone serial killer.