The Block payment system, co-founded by Jack Dorsey, has been accused of its executives and employees of facilitating fraud and misleading investors. Those are the conclusions reached by the authors of an investigation by Hindenburg Research, an investment-research firm that specializes in short-selling.
Two years of studying various documents and interviews with dozens of people, including former Block employees, partners and industry experts, allowed the authors of the investigation to make a rather loud statement: while representatives of the payment system advertised it as a solution to the problems of those who remain outside the banking sphere, "underfunded," behind the facade of revolutionary technology were hidden criminals who use Block services.
Block Inc. formerly known as Square Inc. was founded in February 2009 by Jack Dorsey and Jim McKelvey. Block's main products are Square's merchant payment service and the Cash App mobile app. As Bloomberg wrote today, Block had a market capitalization of $130 billion at its peak in 2021. But since then, the company has already lost most of its value. And after Hindenburg Research published it, Block's stock started falling and lost 22% at the low, but then rebounded to minus 13%. At the close of trading on March 23, Block was capitalized at $41 billion.
For example, aiding and abetting fraudulent government stimulus programs during the pandemic. In the United States, it was possible to get unemployment benefits approved through the Cash App from one account on behalf of multiple individuals from different states. Now, the Massachusetts administration alone is trying to recover more than 69,000 unemployment benefits illegally obtained through the Cash App. Cash App's partner banks have sometimes had 8 to 10 times the number of applicants for benefits than other banks, which, according to investigators, looks like a clear "red flag." They believe that billions of dollars were withdrawn through Cash App as a result of government payment fraud.
Block vastly overstated the number of real users and understated the cost of attracting customers. Former employees estimated that 40% to 75% of the accounts were fake and may have been involved in the fraud. Several Jack Dorsey's and dozens of Ilon Musk and Donald Trump's have successfully coexisted on the platform. Investigators at Hindenburg Research write that they, too, set up accounts in Musk's and Trump's names, were able to get bank cards on them, send money and receive payments.
Even when users were caught doing something illegal, Block blacklisted the account, but did not block it. A former support representative shared screenshots showing how people from blacklisted accounts regularly contacted dozens or even hundreds of other active accounts. This phenomenon of allowing blacklisted users was so common that rappers sang about it in their songs.
In general, the work of rap and hip-hop artists is given a special place in the Hindenburg Research investigation. The authors studied (!) a lot of tracks mentioning Cash App as a great tool for fraud, drug dealing and even paying for murders.
Block responded to the investigation with a statement that it intends to work with the Securities and Exchange Commission and explore legal action against Hindenburg Research "for a factually inaccurate and misleading report." According to Bloomberg News calculations, Hindenburg Research has already examined 30 companies since 2020, and their stock lost an average of about 15 percent the day after the investigation was published. Six months later, their shares were down an average of 26%.