Key Points

  • Reports alleges Block allowed criminal activity to operate on its platform with inadequate compliance systems.
  • The report claims that up to 75% of Cash App's user accounts reviewed by former employees were fake or involved in fraud.
  • Hindenburg alleged that Block inflates Cash App's transacting user base and that up to 35% of Cash App's revenue should be capped by law.
  • The short seller claims that Block routed revenue through a small bank to avoid regulatory caps, similar to rival PayPal.
  • Block intends to explore legal action against Hindenburg Research for what it describes as factually inaccurate and misleading report.

Shares of Jack Dorsey’s Block plummeted on Thursday after short seller Hindenburg Research announced that the payment company was its latest short position, alleging that Block allowed criminal activity to operate with lax controls and inflated Cash App’s transacting user base, a key metric of performance.

Jack Dorsey (Twitter)

The Accuses on Block

Reports accuses Block of taking advantage of the demographics it claims to be helping, with Cash App allegedly thriving on serving “unbanked” customers involved in criminal or illicit activity. The report also claims that Cash App’s compliance programs were deficient, with internal concerns suppressed and user concerns ignored, even as alleged “criminal activity and fraud ran rampant on its platform.”

The firm’s report includes screenshots of internal systems and employee messages, as well as alleged financial misreporting. Up to 35% of Cash App’s revenue is derived from interchange fees, Hindenburg claims, around $892 million in revenue that the short seller said should be capped by law.

Hindenburg also alleged that Block, formerly known as Square, avoids that regulatory cap imposed on large financial institutions by routing the revenue through a small bank, which is one employed by Block rival PayPal and which prompted a Securities and Exchange Commission probe.

The short seller also took issue with Cash App’s practices during the Covid pandemic, when the government issued stimulus checks to qualified American adults. The report alleges that the lockdowns “posed an existential threat” to Block’s critical merchant services business, and that CEO Jack Dorsey tweeted that users could get government payments through Cash App ‘immediately’ with ‘no bank account needed’ due to its frictionless technology.

Former Employees Reveal Shocking Truths about Cash App

Just a few weeks into Cash App’s delivery of the first round of government payments, states were apparently trying to claw back suspected fraudulent payments — “Washington State wanted more than $200 million back from payment processors while Arizona sought to recover $500 million,” said Hindenburg, citing multiple former employees.

Hindenburg also cited interviews with former employees, alleging that “pressure from management has resulted in a pattern of disregard for Anti-Money Laundering (AML) and Know Your Customer (KYC) laws.” The report notes that “this appeared to be an effort to grow Cash App’s user base by strategically disregarding Anti Money Laundering (AML) rules.”

To test the theory, the short seller opened accounts in the name of former President Donald Trump and Tesla CEO Elon Musk, and then obtained a Cash App card, called the Cash Card, under the “obviously fake Donald Trump account,” the report said. The card bearing Trump’s name arrived “promptly” in the mail.

Block

Block Payment Company Responds to Hindenburg Research's Report

“Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual,” the report said.

“In sum, we think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government,” Hindenburg wrote.

Block responded to the reports later on Thursday. “We intend to work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today,” the company said in a press release.

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics,” Block added.

Investors in Block, the payments company founded by Twitter CEO Jack Dorsey, suffered a major blow when shares plunged 19% on Thursday following allegations made by short seller Hindenburg Research. In a report released on Thursday, Hindenburg accused the company of allowing criminal activity to operate with lax controls, and of inflating Cash App’s transacting


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About Block, Inc.


  • Ticker SQ
  • Exchange NYSE
  • Sector Technology
  • Industry Software—Infrastructure
  • Shares Outstandng 529,536,000
  • Market Cap $37.3B
  • Description
  • Block, Inc., together with its subsidiaries, creates tools that enables sellers to accept card payments and provides reporting and analytics, and next-day settlement. It provides hardware products, including Magstripe reader, which enables swiped transactions of magnetic stripe cards; Contactless and chip reader that accepts Europay, MasterCard,...
More about SQ