Short-seller Hindenburg swipes at Block

Block, the company formerly known as Square, faces damning accusations, as short seller Hindenburg Research said the company was its latest short position. In a March 23 report Hindenburg alleged Block plays fast and loose with anti-money laundering rules, resulting in rampant criminal activity on the network. It also claimed the company "wildly overstates" its cash app user base, calling into question the company's performance. It also alleged that Block takes advantage of small businesses that are generally underserved by banks and payments services providers.

Hindenburg said it conducted a two-year investigation that included interviews with former employees, partners and industry experts. The firm also reviewed regulatory and litigation records, as well as government records requests.

The picture that emerged was of a company that "has systematically taken advantage of the demographics it claims to be helping," the report stated. "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."

Sidestepping Durbin Amendment

The Hindenburg report also calls into question Block's practice of sidestepping federally mandated caps on debit card interchange by routing debit card payments through financial institutions that are exempt from the caps. The Durbin Amendment to the Dodd-Frank Act instructed the Federal Reserve to cap debit card interchange assessed by banks and credit unions with assets exceeding $10 billion. Financial institutions with assets under $10 billion aren't restricted by the caps.

Block provides "only a single vague reference" to interchange in its financial and regulatory filings, Hindenburg wrote. But it referenced a 2022 Credit Suisse report that estimated roughly a third of revenues generated by Block's Cash App come from interchange.

Nearly another third of Cash App revenue comes from its instant deposit service, which Hindenburg describes as a "mundane" and possible "predatory" source of revenue that Block "hypes" as "technological breakthroughs." The reality is that "every other major competitor we checked provides a similar service at comparable or better rates," Hindenburg wrote.

Rampant fraud

Hindenburg described how Block's "Wild West approach to compliance" made it easy for fraudsters to ply their trade. "Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user," Hindenburg wrote, citing evidence provided by former employees.

Fraudulent uses of Cash App are so prolific, that rappers brag about it in their songs, the report noted. There is even a gang in Baltimore that goes by the name Cash App. Several members of that gang were arrested in 2021 and charged with distribution of fentanyl and cocaine. Cash App also is "by far" the top app used in reported U.S. sex trafficking cases, the report stated.

Cash App was especially popular destination for fraudulent COVID-19 relief payments, the report alleged. In Massachusetts, suspected fraudulent payments at Cash App's partner bank exceeded those at money center banks, like JPMorgan Chase, despite having four to five times fewer accounts.

"In an apparent effort to preserve its growth engine, Cash App ignored internal employee concerns, along with warnings from the Secret Service, the U.S. Depart of Labor OIG [Office of Inspector General], FinCEN [Financial Crimes Enforcement Network], and state regulators which specifically flagged the issue of multiple COVID relief payments going to the same account as an obvious sign of fraud."

Beyond facilitating payments for criminals, Cash App has been "overrun by scam accounts and fake users," the report said, citing numerous interviews with former employees, which leads to the company overstating the size of its user base.

Block balks

Block promptly responded that the report was "inaccurate" and suggested it was issued to further Hindenburg's short selling activities around Block stock. Short sellers bet that a stock's price is going to fall, by borrowing then selling shares in hopes of buying them back at a lower price.

"We have reviewed the full report in the context of our data and believe it's designed to deceive and confuse investors," Block wrote. Block added that it plans to work with the Securities and Exchange Commission to "explore legal action" against Hindenburg for what the firm described as a "factually inaccurate and misleading report" about Cash App.

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