Short Seller Alleges Jack Dorsey’s Co. Facilitates Fraudulent Activity

Following Hindenburg Research’s Thursday announcement that Jack Dorsey’s Block, Inc. (NYSE:SQ) was its latest short position, shares of the payment company plummeted as much as 19% intraday to $60 a share.

The research firm asserted that Block (formerly known as Square) allegedly permits criminal activities which “highly” amplify Cash App’s user base. According to Hindenburg, this has been proven to be one of the major performance indicators for the app.

The research firm also characterized Block’s internal systems as a “Wild West approach” with regards to compliance.

“Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping,” Hindenburg said in its report, noting that Block’s Cash App flourished by servicing their “unbanked” clients.

The report claims that Cash App’s unbanked customers were engaging in unlawful and illicit activities, as well as indicating the company’s existing compliance programs were inadequate.

Hindenburg said that throughout a two-year investigation, they spoke to multiple ex-Block employees who exposed how their internal worries were disregarded and user issues were not addressed, notwithstanding an alleged “outbreak of criminal activity and fraud on its platform”.

The short seller’s extensive report also contains detailed screenshots of internal processes and employee correspondences, as well as indications of alleged financial misreporting.

Based on the report, Cash App could be generating up to $892 million from interchange fees alone – that’s a whopping 35% of the company’s total revenue. Hindenburg is calling for regulatory intervention in order to cap these kinds of fees.

The research firm further alleges that Block circumvents the legal constraints set in place for larger financial institutions by channeling their revenue through a lesser-known bank.

The small-bank routing technique is one utilized by PayPal, Block’s competitor, Hindenburg says, and which elicited an investigation from the Securities and Exchange Commission.

“A Freedom of Information Act (FOIA) request we filed with the SEC indicates that Block may be part of a similar investigation,” the short seller wrote.

Also, according to interviews with ex-employees, Hindenburg alleged that “pressure from management has resulted in a pattern of disregard for Anti-Money Laundering (AML) and Know Your Customer (KYC) laws.”

The report draws attention to the fact that there seemed to be a conscious effort to grow Cash App’s user base by irresponsibly disregarding AML regulations.

In order to confirm the hypothesis, the short seller established accounts in the name of former President Donald Trump and Tesla CEO Elon Musk. Subsequently, a Cash App card was procured using an obvious bogus Donald Trump account, as stated in their report.

The card with Trump’s name arrived without delay in the mail.

“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.

Reference: CNBC

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