Hindenburg Research shorted Jack Dorsey's Block, formerly known as Square. When H.R. shorts stocks they publish their findings in a detailed research article. Today, H.R. published their research article about Block titled Block: How Inflated User Metrics and “Frictionless” Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion. As usual their articles are very long and offer a lot of details and reasons why they decided to short the stock/company.
Block's main product is their Cash App, where users can send each other payments and also buy some crypto assets like bitcoin. They advertise themselves as the easiest way to send, spend, save and invest money. The app is available both for iPhones and Android devices. Even if you haven't used the Cash App, you may have heard about it. I have not used the app, but have heard a lot in the past. What I have heard so far were positive. Regardless H.R.'s decision to short the company, app may still be useful for some. It is for everybody to decide for themselves.
Block used to be Square. For some reason Jack Dorsey and company decided to rebrand and change the name of the company. It is not clear to me why they would do that, as Square was a good brand and had a decent reputation as a revolutionary company as new kind of payment system. I have seen their products that attach to mobile devices and let merchants or users accept payments. At some point company's focus shifted to their Cash App. Not sure if they still continue offering products to merchants, but it is clear they saw bigger opportunity attracting retail investors and regular mobile phone users. I thought it was a great move when Cash App started offering bitcoin on their platform.
Block is a publicly traded company, and its stocks are listed in NYSE under the ticker of SQ. It looks like SQ dropped about 15% today, and it is possible it may have to do with Hindenburg Research's article and short position. Before H.R. announced their latest target, in January they have taken short position on Adani Group's stocks. That was one of the biggest, if not the biggest investment positions and research H.R. has done so far. It made big news even weeks after. Adani Group company stocks prices declined significantly, and H.R.'s short position probably returned decent returns. But H.R. doesn't take a break and continue with their investment strategy, which is to conduct long and detailed research, find weaknesses in publicly traded companies and take short position.
Just like with Adani Group article, H.R. outlines serious list of allegations/accusations that Block has been involved in. Some of the main allegations they list are misleading or false reporting of number of users and Cash App being used for criminal purposes by its users. H.R. says that Block has significantly inflated number of users on Cash App, and large number of accounts may be fake. This reminds what Elon Musk said about Twitter when he was trying to walk away from the Twitter deal. Musk's main concern was that Twitter lied about the true user numbers on Twitter, and how many were fake or bots. Jack Dorsey at some point was a CEO of Twitter and Block/Square at the same time. If this allegation about inflated user-base numbers by H.R. is true, this would look like a pattern for companies ran by Dorsey.
User-base numbers are important for companies whose business model relies on user growth. Anybody would like to see these numbers to go up, and there aren't always exact numbers. It may be in company's interest to use bigger numbers, just because this may reflect on company valuation. This also applies to networks, even the decentralized ones like Hive and Bitcoin. The growth of the network can be seen by growth of user-base, daily and monthly active users. But it is not easy to determine the exact numbers. Simply having millions of accounts doesn't necessarily represent the true user-base.
H.R. makes more serious allegation against Block, by listing potential fraud or allowing criminal activities. Below are some of what they say about Block:
- Core to the issue is that Block has embraced one traditionally very “underbanked” segment of the population: criminals. The company’s “Wild West” approach to compliance made it easy for bad actors to mass-create accounts for identity fraud and other scams, then extract stolen funds quickly.
- Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user. A former customer service rep shared screenshots showing how blacklisted accounts were regularly associated with dozens or hundreds of other active accounts suspected of fraud. This phenomenon of allowing blacklisted users was so common that rappers bragged about it in hip hop songs.
- Cash App was also cited “by far” as the top app used in reported U.S. sex trafficking, according to a leading non-profit organization. Multiple Department of Justice complaints outline how Cash App has been used to facilitate sex trafficking, including sex trafficking of minors.
- There is even a gang named after Cash App: In 2021, Baltimore authorities charged members of the “Cash App” gang with distribution of fentanyl in a West Baltimore neighborhood, according to news reports and criminal records.
- Beyond facilitating payments for criminal activity, the platform has been overrun with scam accounts and fake users, according to numerous interviews with former employees.
- Former employees described how Cash App suppressed internal concerns and ignored user pleas for help as criminal activity and fraud ran rampant on its platform. This appeared to be an effort to grow Cash App’s user base by strategically disregarding Anti Money Laundering (AML) rules.
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These are really serious allegations. When it comes to payment systems, there is always going to be bad actors who will try to use the system for their fraudulent and/or criminal activities. Be it cash, banks, paypal, moneygram, venmo, or crypto - they were at some point manipulated and used for fraud and criminal purposes. The question is how widespread was Cash App use for such use cases, especial in comparison to other payment mechanisms. The follow up question is what measures Block had in place, and did/do they only care about the user-base numbers. I find it hard to believe that a publicly traded company that not only suppose to file their company papers on regular basis, but also have to meet certain standards by regulating agencies, would knowingly or willingly violate any laws. Especially, because they are a payments platform, Block probably would have to be have put mechanisms in place to comply with laws.
There is a competition among various companies to become the go to platform for payments. There are many options. Even Apple has been pushing its Apple pay services. But also there are alternative options like bitcoin and crypto. This competition will continue for a while, it seems. At this time having its reputation attacked for Cash App, and by extension for Block, wouldn't be desirable.
I found this article by H.R. interesting because this one seems like going to be about reputation. On one hand H.R. has build itself to be a reliable research investment company, and their findings usually are accurate, or least markets seems to agree. On the other, they business involves questioning the reputation of publicly traded companies. Will this ruin Block's and Cash App's reputation? Even worse, would this article bring investigations by government agencies? It seems we won't know the answers to these questions in near future, but this topic sure will attract attention for a while. Let me know your thoughts in the comments.