Block | Jack Dorsey: Hindenburg shorts Jack Dorsey’s payments firm Block

“Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping,” the short seller said in a note published on its website.

The U.S. short-seller, behind a market rout of over $100 billion in Adani Group, said in its latest report that former Block employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.

“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, the note added.

The agency said it had involved dozens of interviews with former employees, partners, and industry experts, extensive review of regulatory and litigation records, and FOIA and public records requests.

Shares of Block fell 18% in premarket trading after the report.

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According to the report, Block embraced criminals, and 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.

With its influx of pandemic Cash App users, Hindenburg says Block quietly fueled its profitability by avoiding a key banking regulation meant to protect merchants. “Interchange fees” are fees charged to merchants for accepting use of various payment cards.

Congress passed a law that legally caps “interchange fees” charged by large banks that have over $10 billion in assets. Despite having $31 billion in assets, Block avoided these regulations, the report said, by routing payments through a small bank and gouging merchants with elevated fees.

The report says Block has never revealed the full economics of this category, yet over one-third of Cash App’s revenue came from this opaque source, according to a 2022 Credit Suisse research report.