After Adani, Hindenburg Accuses Block Of $1B Fraud And Misleading Investors

The short seller's report said, "the “magic" behind Block’s business has not been disruptive innovation, but rather the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics."

Hindenburg released this report after carrying two years of investigation on Block. The short seller's research includes dozens of interviews with former employees, partners, and industry experts, extensive review of regulatory and litigation records, and FOIA and public records requests.

It concluded that Block has systematically taken advantage of the demographics it claims to be helping.

Block which was formerly known as Square Inc, is a $44 billion market cap company. Hindunberg stated that the company claims to have developed a “frictionless" and “magical" financial technology with a mission to empower the “unbanked" and the “underbanked".

Block offers payment and mobile banking services for merchants and consumers.

The Nathan Anderson-backed research firm shed great limelight on Block's CASH App platform. According to them, Block's climb to stardom comes due adoption of the Cash App.

But Hindenburg claimed that former employees estimated that 40%-75% of accounts on Cash App that they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.

Hindenburg argued that the core of the issue is that Block has embraced one traditionally very “underbanked" segment of the population: criminals. The company’s “Wild West" approach to compliance made it easy for bad actors to mass-create accounts for identity fraud and other scams, then extract stolen funds quickly.

The case of Block is quite spooky, especially its Cash App which has sparked many hip-hop songs.

Hindenburg's report said, even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user.

A former customer service rep shared screenshots with Hindenburg showing how blacklisted accounts were regularly associated with dozens or hundreds of other active accounts suspected of fraud. This phenomenon of allowing blacklisted users was so common that rappers bragged about it in hip-hop songs.

Hindenburg said, CEO Jack Dorsey has publicly touted how Cash App is mentioned in hundreds of hip-hop songs as evidence of its mainstream appeal. A review of those songs shows that the artists are not generally rapping about Cash App’s smooth user interface—many describe using it to scam, traffic drugs or even pay for murder.

“I paid them hitters through Cash App" A quote Hindenburg cited while revealing that Block paid to promote a video for a song called “Cash App" which described paying contract killers through the app. The song’s artist was later arrested for attempted murder.

Also, Cash App was cited by far as the top app used in reported U.S. sex trafficking, according to a leading non-profit organization. Multiple Department of Justice complaints outline how Cash App has been used to facilitate sex trafficking, including the sex trafficking of minors.

Hence, Hindenburg said, "Block can and should clarify to investors an estimate on how many unique people actually use Cash App."

Beyond facilitating payments for criminal activity, Hindenburg stated that the platform has been overrun with scam accounts and fake users, according to numerous interviews with former employees. Some of the fake accounts on the app have usernames of the biggest individuals such as "Donald Trump" and "Elon Musk". Even "Jack Dorsey" is the user name of multiple fake accounts.

Hindenburg highlighted a bull case for Block. By end of 2019, Block's merchant services accounted for $1.39 billion in gross profit, compared to the consumer-facing Cash App, which accounted for only $457.6 million of gross profit.

But these figures changed drastically during the pandemic. Hindenburg said many merchant businesses locked down and individuals activated millions of Cash App accounts to receive government stimulus and unemployment payments.

By end of 2020, Cash App reported 36 million monthly activities, which has since grown to 51 million. By 2020-end, Cash App's gross profit reached $1.2 billion, a 170% growth rate from the prior year, compared with merchant services gross profit of $1.5 billion, an 8% growth rate from the prior year

Further, Hindenburg reported that even as billions of fraudulent transactions were being processing through Cash App’s platform, Block insiders were hitting the exit to the tune of more than $1 billion in insider stock sales between March 2020, the beginning of the pandemic and December 31, 2021.