Late last month, short-seller Hindenburg Research released a bombshell report on payment company Block’s apparent record of criminality. We briefly covered this, but if you missed it, Hindenburg is an infamous short-selling firm, recently boosted by its takedown of Indian conglomerate Adani. Hindenburg accused Block of building its popular Cash App platform on a strategy of non-compliance and illegality, facilitating billions of dollars of pandemic-relief fraud. Hindenburg further alleges that Block ignored clear signs and warnings of fraudulent activity and unashamedly capitalized on this fraud-driven growth.
The report is worth reading, but here are some key points:
On the issue of non compliance
- Block welcomed a major underbanked segment of the population: criminals. According to Department of Justice indictments, Cash App is regularly used by gangs such as the Sinaloa Cartel to distribute drugs like fentanyl and methamphetamine
- Hindenburg claims that the payment company’s compliance team let fraudulent accounts freely grow on the Cash App platform, allowing users to freely transact and even obtain debit cards under identities that were clearly not their own. Some former employees estimated that 40-75 percent of the accounts on the entire platform were fake, fraudulent or associated with a single individual.
- Unsurprisingly, for a significant portion of its existence, Block failed to adhere to legal requirements to collect Social Security numbers for cash card users. Block now acknowledges that this oversight was illegal.
- Block stonewalled a Consumer Financial Protection Bureau investigation for over two years before being forced by the courts to comply in November 2022.
On the issue of pandemic-relief fraud
- In response to the Covid-19 pandemic, Block began prioritizing Cash App’s potential to provide relief funds, quadrupling its direct deposit account user base from 3 million to 14 million accounts on the back of this service.
- As funds started streaming into the Cash App system, states quickly realized that hundreds of thousands of accounts were engaging in fraudulent activity. Massachusetts in particular sought to recover over 69,000 unemployment claims just four months into the pandemic.
- Based on conversations with former employees, Hindenburg Research notes that a major reason fraud was so rampant was because Block permitted single accounts to receive unemployment payments for multiple individuals across various states. In other words, if one wanted to defraud multiple states, one only needed to set up a single Cash App account.
- Cash App’s partner in this process was Sutton Bank, a small bank based in Ohio, which Hindenburg Research alleges Block works with to avoid interchange fees typically associated with financial companies as large as Block.
- Data from the Ohio Department of Job and Family Services shows that 32,120 unemployment claimants associated with Sutton Bank were disallowed over various suspicions, including fraud. As Hindenburg notes, that figure is eight times higher than the number of disallowed claimants who received payments from Huntington Bank, the state’s top processor of legitimate unemployment claims during the pandemic. If every bank in the state were doing its due diligence, one would expect the bank which processed the most unemployment claims to also have processed the most fraudulent claims, due to sheer volume. The fact that Sutton outstripped Huntington to such an enormous degree suggests Sutton did almost nothing to verify its claimants’ identities.
- Similarly, Hindenburg reports 31,726 claims of applicants using a Sutton Bank account which had been used by another claimant, a likely sign of fraud. Meanwhile, top processor Huntington Bank had only 3,390 similarly suspicious transactions.
- Based on Hindenburg’s correspondence with the Massachusetts Department of Unemployment Assistance, the short-seller found that suspect payments at Sutton Bank were 82 percent higher than those of JPMorganChase and 108 percent higher than Wells Fargo, even though these banks had up to five times as many deposit accounts.
All told, Block’s non-compliance and illegality during the pandemic was extremely profitable for management. The company’s stock grew by more than 639 percent between March 20, 2020 and August 5, 2021, peaking at a market cap of just over $120 billion. The payment company’s top executives, CEO Jack Dorsey and co-founder Jim McKelvey, offloaded more than $1 billion worth of stock during the pandemic. Hindenburg’s analysis shows that between March 1, 2020 and December 31, 2021, Dorsey sold approximately $574.3 million in stock at prices as high as $277.51 per share. McKelvey sold approximately $468.2 million in stock at prices as high as $261.38.
- “reviewing the adequacy and effectiveness of our disclosure controls and procedures, and developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;”
- “reviewing our program and policies on risk assessment and risk management, including risks associated with data privacy and cybersecurity;”
- “reviewing and overseeing related party transactions for which review or oversight is required by applicable law or required to be disclosed in our financial statements or SEC filings”
How can Larry Summers reasonably claim to have performed these and many other functions to an appropriate degree, especially considering how stretched he is with his multiple corporate entanglements, pundit gigs and professorial responsibilities? If Summers is unable to take his responsibilities at Block and other firms seriously, then what is the true purpose of these roles?
It seems clear to us that Summers is an extremely bad judge of corporate conduct and quality. Even worse, he may just be comfortable cynically lending his name and reputation as a former Treasury Secretary and Democratic Party policy leader to unscrupulous wealthy individuals. Summers was a board member of Lending Club, which was fined by the Federal Trade Commission for deceiving customers. The firm also actively deceived investors and partner firms. Summers was also an advisor to conglomerate Digital Currency Group, which was charged by the Securities and Exchange Commission for the unregistered sale offer and sale of securities to retail investors. While Block is yet to be formally charged, it seems likely that another Summers-associated firm will find itself in the law’s crosshairs.
It’s high time that members of the press who regularly turn to Summers for his views on the economy begin questioning him on how he is able to adequately perform his multiple advisory roles and moreover, why there is a pattern of illegality at firms he advises. Or they could simply toss him to the aether, and platform non-conflicted experts instead.
PHOTO CREDIT: “Lawrence H. Summers – World Economic Forum Annual Meeting Davos 2010” by World Economic Forum is licensed under CC BY-NC-SA 2.0.