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Popular short-selling firm Hindenburg Research is owned by parent company Square Block Inc. In plain sight, accusing the company of fraud, predatory practices, and thriving users in a report released Thursday morning.

“In short, we believe that Block has misled investors about key metrics and has adopted predatory offerings and sub-par compliance practices to promote growth and profitability by facilitating fraud against consumers and the government,” the company wrote in its report.

As a disclaimer on the report, the Hindenburg noted that it took a short position in shares of Block, formerly Square, Inc.

After the report was released early Thursday morning, Block shares were down 17% in premarket trading from their previous close of $72.65. The company trades on the New York Stock Exchange under the symbol SQ. Things took a turn for the worse when the markets opened, with shares dropping below $58, their lowest level since the beginning of the year, before recovering to around $63 at the time of writing. It’s down about 13% today, currently.

Block did not immediately respond to a request for comment DecodeHe has not yet issued a statement on the report.

Misleading user accounts?

Hindenburg alleges that former Block employees told their investigators that the company “overestimated” the number of its users by as much as 75% and that it deliberately relied on a “Wild West approach to compliance” to lure bad actors who create accounts in the bulk of identity scams and other fraud.

The company also accuses Block of blacklisting individual accounts found to have committed fraud, but not of users who opened dozens of other accounts that they allegedly used for criminal activity.

Hindenburg writes that it tested how easy it was for a user to open accounts in someone else’s name by naming two accounts “Donald Trump” and “Elon Musk.” The company even included a picture of the debit card I ordered with the name “Donald J. Trump.”

When it filed its 2022 annual report last month, Block reported that the Cash App had 51 million active users — up 16% from 2021.

Compliance issues

The report claims that when the covid-19 pandemic threatened its revenue from sales services, Block “suppressed internal concerns and ignored users’ pleas for help as criminal activity and fraud ran rampant on the platform.”

In its 2019 annual report, Block (at the time called Square) reported $4.7 billion in total net revenue. Of that, 65% came from transaction fees, 22% from subscriptions and software work, 2% from hardware like the Square Terminal, and the rest from Bitcoin, according to an SEC filing.

Block makes money in Bitcoin when you buy it and then sell it to users through their Cash app.

The following year, as the pandemic led to widespread lockdowns, Block saw transaction, subscription, and hardware revenue decline in the second quarter. But in the second half of 2020, things started to turn around. Transaction fees have rebounded as retailers process “non-card” transactions, which command higher fees. And the Cash App helped grow the subscription category to $1.5 billion in revenue – up 49% from the previous year.

By the end of 2022, subscription revenue had grown to $4.5 billion, roughly equal to the company’s entire net revenue in the year before the onset of the pandemic.

The Hindenburg report claims that the Block’s Cash app grew so large because it was used to fraudulently claim COVID relief payments and that the company ignored requests from federal and state law enforcement agencies.

In an apparent effort to maintain its growth engine, the Cash App has ignored internal employee concerns, along with warnings from the Secret Service, the US Department of Labor OIG, FinCEN, and government regulators, all of which specifically highlight the problem of multiple COVID relief payments. You go to the same account as clear evidence of fraud,” Hindenburg wrote in his report.

Harsh words for the insiders

With Block’s stock price up more than 600% during the pandemic, Hindenburg notes that Block founders Jack Dorsey and James McKelvey have sold more than $1 billion in shares.

The report is particularly critical of Dorsey, saying he has “declared himself to care deeply about the demographics he exploits”.

In 2020, Dorsey commented on how pervasive the Cash App is in hip hop music.

“We have a very regular customer for Cash App. Proof of that — I’ve talked about this on the call, maybe on stage before, but the number of hip-hop songs that have the phrase Cash App or even the name Cash App in it is pretty staggering. He said at the time, I think it’s more than 1,000 or 2,000 at the moment.

Pop culture references to the Cash App have become so widespread that researchers have written academic papers on how it affects financial inclusion in black American communities. A 2022 paper concluded, “While the Cash App gives participants the flexibility to schedule transactions from anywhere, it introduces hidden fees and social media gaming strategies that pose unwanted financial risks (such as participating in the lottery).”

It mentions a few cryptocurrencies

Notably, the 17,000-word report only mentions Bitcoin twice, saying that in 2018 the company began allowing users to make BTC transactions with their cash app accounts. The main focus of the Hindenburg report is how Block has managed its business during the pandemic.

If he had focused more on cryptocurrency, this would not have been the first time Hindenburg criticized the crypto industry.

At the end of 2021, when the global cryptocurrency market cap reached a record $3 trillion, Hindenburg announced a $1 million reward for “information leading to previously undisclosed details about backing the stablecoin cryptocurrency Tether.”

At the time, Tether revealed in a report that only 10% of the reserves backing the stablecoin, which is pegged 1:1 to the US dollar, were held in cash and bank deposits. Almost half of the backing of tether was held as commercial paper, which is a form of short-term unsecured debt issued by companies.