Hindenburg research has done some great work unearthing fraudulent companies and I believe there isn’t a great chance that their research about fintech Square (SQ) gets debunked.
Square shares cratered by 15% yesterday which piles on the pressure as we are right smack dab in the middle of a global banking crisis.
Europe is now on the ropes.
Hindenburg’s main argument is that Block allowed criminal activity to operate with sparse controls and “highly” inflates Cash App’s transacting user base, a key metric of performance.
It’s common for tech companies to skirt the rules.
Just look at companies like Uber and Facebook.
It’s largely believed that not playing fair is the way to get ahead in Silicon Valley and Block is no different.
It seems that it’s only a problem if one is caught.
The aggressive managing style of tech can backfire big time.
A 2-year investigation has shown major gaps in the business model and the company essentially facilitated dodgy behavior on the Cash App via “unbanked” customers.
The report alleges those unbanked customers were involved in criminal or illicit activity.
The firm’s extensive report includes screenshots of internal systems and employee messages. It also highlighted alleged financial misreporting.
Up to 35% of Cash App’s revenue is derived from interchange fees, Hindenburg alleged. That’s around $892 million in revenue that the short seller said should be capped by law.
But Block, formerly known as Square, avoids that regulatory cap imposed on large financial institutions by routing the revenue through a small bank, Hindenburg alleged.
The report notes that “this appeared to be an effort to grow Cash App’s user base by strategically disregarding Anti Money Laundering (AML) rules.”
Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.
Block has misled investors on key metrics and embraced predatory offerings and compliance worst practices in order to fuel growth and profit from the facilitation of fraud against consumers and the government.
Although I understand that some tech firms operate on the margins, there is a limit to some of these shenanigans.
Fake accounts are something right out of the page of Wells Fargo playbook and it does nothing in the long term to grow trust between investors, shareholders, or the end user.
Time and time again, there has been a long laundry list of tech management that has failed to meet a higher standard, and gone are the times when we glamorized tech management like they are some type of savior.
The truth is that they are mediocre people at best and for every great executive there are many underwhelming ones as well.
I would stay away from Block’s stock until they can prove they are clean and I would buy the dip in other names that breed more trust in what they are doing.
