Following a 2-year investigation, Hindenburg announced that Block (previously known as Square) had “systematically taken advantage of the demographics it claims to be helping.” The report accused the company of accelerating “fraud against consumers and the government,” as well as evading regulation. Additionally, Block’s loans and fees were criticized for being “predatory” and developed to “mislead investors with inflated metrics.”
The US-based short seller described conducting various interviews with ex-employees, partners, and industry experts, along with conducting thorough investigations of regulatory and litigation records, FOIA, and public records requests.
Hindenburg Report on Block
In a report issued on March 23rd, Hindenburg asserted that Block had no apparent advantage over its rival platforms such as PayPal/Venmo, Zelle, or Apple. Furthermore, the report stated that the company adopted non-compliance as a means of increasing its user base, resulting in it attracting a very underbanked segment of the population, i.e., criminals.
Hindenburg stated that over a dozen former CashApp employees admitted to being under pressure from management, resulting in the disregard for Anti-Money Laundering (AML) and Know Your Customer (KYC) provisions. Furthermore, the company allowed fraudulent accounts to grow, facilitating scams on Cash App, which generated bogus income and exaggerated user metrics.
The report also disclosed that Jack Dorsey, who resigned as Twitter CEO in mid-2021, and other Block insiders, including James McKelvey, CFO Amrita Ahuja, and Cash App manager Brian Grassadonia, sold more than $1 billion of company shares, which appreciated “on the back of its facilitation of fraud.”
“We also believe Jack Dorsey has built an empire—and amassed a $5 billion personal fortune—professing to care deeply about the demographics he is taking advantage of. With Dorsey and top executives already having sold over $1 billion in equity on Block’s meteoric pandemic run higher, they have ensured they will be fine, regardless of the outcome for everyone else.”
The allegations leveled against Block also involved enhancing its revenue and user growth by facilitating billions of dollars worth of pandemic-relief fraud. The company shifted its focus to the potential use of Cash App in pandemic relief during this period.
The report indicates that almost 11 million people activated the direct deposit feature to receive stimulus and unemployment payments from the US government. As the funds flowed into Cash App’s system, Block charged a steep fee of 0.5% to 1.75% to expedite payments that would otherwise take 1-3 business days.
The report also stated that Block disregarded the “obvious signs of fraud,” despite receiving warnings from former employees and the government.
Block retaliated against the short seller, claiming that the report was factually “inaccurate and misleading.” In its latest update, the firm stated that it was collaborating with the US Securities and Exchange Commission (SEC) while also exploring legal action against Hindenburg Research. It further claimed that the report was “designed to deceive and confuse investors.”