Special: The Hindenburg 'Block'buster Starring Jack Dorsey
After Gautam Adani, Hindenburg Research guns for Payments Firm Block Inc, and opens a can of worms. Girish Linganna decodes the latest report
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FollowOn March 23, news agencies and the online media were abuzz with the news that, US-based short-seller Hindenburg Research whose report on billionaire Gautam Adani’s empire in January led to a stock rout in Adani group, was now training its guns on Jack Patrick Dorsey. An American Internet entrepreneur-programmer, Dorsey co-founded -- and is ex-CEO of -- Twitter Inc. Dorsey is also co-founder, principal executive officer and chairperson of Block Inc, the developer of the Square financial services platform (2009).
A day later, in intra-day trading on Friday (March 24), Dorsey’s fortunes had shrunk by $526 million. He is now worth $4.4 billion, says the Bloomberg Billionaires Index. The 11 per cent drop was his worst single-day depreciation since May 2022.
Dorsey’s mobile payments firm, Block (2021), was earlier known as Square Inc., a $44-billion market cap company that had come up with a disruptive idea, using a tiny card reader that could be plugged into the jack of a smartphone’s headphone to facilitate vendors who take credit card payments through the company’s Cash App.
Block -- which offers payment and mobile banking services for merchants and consumers -- was supposed to have "widely overstated" its user base, understated its customer acquisition costs and generated illegitimate revenue, systematically exploiting the demographics it claims to be serving.
The report -- which the Nathan Anderson-backed research firm, Hindenburg, claims was published after a two-year investigation and includes dozens of interviews with partners, former employees and industry experts, extensive review of regulatory and litigation records, and Freedom of Information Act (FOIA) and public records requests -- also said Block Inc. had 'willingly facilitated fraud against consumers and governments, avoided regulation, dressed up predatory loans and fees as revolutionary technology and misled investors with inflated metrics' leveraging government stimulus schemes in pandemic times.
According Hindenburg, roughly 40 per cent-75 per cent of Block’s accounts that they evaluated were fake, fraudulent, or subsidiary accounts traced to a single individual. The report claims that Block thrived on 'unbanked' customers. However, the report adds that most of the 'under-banked' customers were either criminals or people involved in illegal activities.
Even when fraudulent or other illegal activity was detected, Block did not ban the user, but simply blacklisted the account. Some of Cash App's fake accounts have usernames like 'Donald Trump' and 'Elon Musk'. Even multiple fake accounts have the user name, 'Jack Dorsey'.
By end-2019, Block's merchant services accounted for $1.39 billion of its gross profit, as against the consumer-centric Cash App, which accounted for only $457.6 million of its gross profit. This scenario changed dramatically during the pandemic. Hindenburg says many merchant businesses downed shutters and individual businessmen activated millions of Cash App accounts to receive government incentives and unemployment doles.
By end-2020, Cash App reported 36 million activities in a month, which figure has since ballooned to 51 million. In the same period, Cash App’s gross profit touched $1.2 billion -- growing 170% YoY -- compared with merchant services gross profit of $1.5 billion -- an 8% growth YoY.
OF HIP-HOP AND CASH APP
The company's strong-arm approach to compliance facilitated the mass creation of accounts with identity fraud intent and other scams, quickly suctioning out stolen funds. Block's case -- especially its Cash App, which sparked many hip-hop songs -- is quite sinister. Jack Dorsey was stated to have publicly touted how Cash App was referred to in hundreds of hip-hop songs, demonstrating its mass appeal. A review of these songs, however, presents a different picture.
The artists are apparently not rapping about Cash App's seamless user interface -- but are using it to refer to scams, drug-trafficking, or even hiring contract killers.
"I paid them hitters through Cash App" goes one such line cited by Hindenburg to substantiate its claim that Block had paid to promote a song video, named 'Cash App', which spoke of paying supari killers through the app. The creator of the song video was, subsequently, arrested on charges of attempted murder.
Cash App was said to far outstrip other apps in the US used for the purpose of sex trafficking, according to renowned a non-profit organization. Multiple Department of Justice complaints underscore how Cash App was used to facilitate sex trafficking -- including that of minors.
THE INDIAN CONNECTION
Block’s Indian-origin Chief Operating Officer Amrita Ahuja's name also cropped up in the Hindenburg report. Ahuja is also Member, Board of Directors, at Discord and Airbnb. In the past, she was CFO of game developer-publisher Blizzard Entertainment. In 2018, Ahuja was offered the post of CFO at Square Inc. Her parents are Indian immigrants.
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