Another Week... Another Multi-Billion Dollar Fraud (Allegedly)

[Music] 2022 was the worst year for financial fraud ever and we are now three months into 2023 and it's shaping up to be another record-breaker six report from Hindenburg research that accused Donnie of Fraud and new ways for Crooks to try to steal your money from blocking and has also accused the company of one billion dollars fraud Jack Dorsey is best known as the founder of Twitter a company that only made a profit in two years after he had already sold most of his shares but it still made him over three billion dollars including the money he made after he sold his remaining shares to musk Dorsey also made 2.9 Million Dollars by selling an nft of his first ever tweet to some idiot on the internet that thought it was a good investment the same nft was put up for auction early last year hoping to fetch 48 million dollars under the hammer the auction ended with a top bid of just 280 dollars a loss of 99.9903 percent oh yeah this isn't funny well it's funny everybody else but not for this guy other investors in dorsey's world-changing Technologies might not be so lucky last week Hindenburg research a firm that makes money by shorting companies that are operating fraudulently and then releasing reports outlining their fraud took aim at Dorsey in his latest business fresh off the back of their scathing adani report that led to the companies of Asia's richest man losing over a hundred billion dollars in market cap Hindenburg released a similar report about Bush's new company block of companies not faring well after a Hindenburg bet against them block Inc formerly square is a financial technology conglomerate that owns companies that you will all be familiar with square is an easy to use payment processing and banking software for small businesses title is a music streaming service founded by rapper Jay-Z which was acquired by Block in 2021 for 300 million dollars and cash app a mobile payment service that lets users send and receive money trade stocks and invest in crypto without actually being part of the banking system at all blocking had a market cap of over 100 billion dollars in 2021 so it was actually worth significantly more than Twitter even at the inflated price that musk paid for it today it is worth 60 percent less than its all-time Peak and Hindenburg is arguing that it will fall by a further 65 percent to a hundred percent because of the flaws in the business that doesn't look good the Hindenburg report is 17 000 words long I have gone ahead and read it so you don't have to but it outlines how block has been systematically defrauding their customers investors and authorities the report centered around six key Revelations that hindenburger covered through employee leaks Private Investigations and just looking at the data that nobody else wanted to the first problem they found was that cash app does not have nearly as many users as the company is reporting because fake accounts are too easy to make since cash app is not technically a bank it doesn't have the same identification requirements to open an account investors love user growth because having more people using a networked platform exponentially makes the platform more valuable since cash app's main feature is being able to send money directly to other cash app users its value as the service increases with every new user it has other network companies like Facebook Uber and Twitter spend a lot of resources acquiring new users because Uber is only valuable as a writer if you can find a driver and vice versa Facebook is only valuable if people can connect with their friends on it and Twitter is only valuable because some billionaire edged Lord got forced to buy it by the SEC okay that last one was a little bit different but investors and companies building a network are willing to pay a lot of money for user growth even if it means the business is not profitable while they are doing it cash up claimed to its investors that it had 80 million active users that had made at least one transaction in the last year that would be roughly 25 percent of all people in the markets they operated in fintech companies make much more money from each individual users than a social media site so 80 million users in growing is a very impressive result for a service that has only been around for less than 10 years Hindenburg however had heard rumors from company employees that people were making duplicate accounts for themselves with some individuals having hundreds of cash app accounts former employees estimated that 40 to 75 percent of accounts were fake involved in fraud or were additional accounts tied to a single actual individual to test how easy it was to set up a fake account Hindenburg created a cash app account for Elon Musk and Donald Trump the accounts were automatically approved and within minutes they were able to successfully exchange funds an investigator at the firm was also able to order a cash app Visa card under the name of Donald J Trump the staff member's real name is not Donald J Trump hittenberg wanted to make that clear security and verification is often one of the first casualties when building an app around ease of use but this becomes a real problem for cash app its investors and the authorities when Hindenburg revealed why people were making so many accounts and here's a Hint it wasn't to inflate user metrics for investors so it's time to learn how money Works to find out how Twitter's old CEO might bankrupt his new company faster than Twitter's CEO bankrupt his old one this week's lesson was made possible by brilliant it's crucial to conduct your own investigation and form your own opinions when examining reports such as the one from Hindenburg thankfully brilliant provides an excellent course to help you begin brilliant offers a course called math for quantitative Finance which equips you to analyze reports like these enabling you to confidently assess them and critically evaluate their assertions brilliant encompasses various subjects including computer science given recent advancements in AI it's essential to have a fundamental grasp of how the underlying process works learning with brilliant allows you to interact with their content and put your newfound knowledge into practice leading to more efficient methods of retaining information brilliant has successfully transformed learning into an enjoyable experience instead of approaching it with Dread like a school task you can eagerly immerse yourself in the realm of Education with just a few clicks on your phone or computer whether you're pursuing fresh insights or simply aiming to keep your mind agile brilliant has your back it's captivating and Hands-On approach to learning enables you to stay inquisitive and well informed with minimal effort to get brilliant for free for 30 days go to brilliant.org forward slash how money works or click the link in the description and the first 200 of you will get 20 off Brilliance annual premium subscription the reason that people are making so many cash up accounts is the second major issue that Hindenburg raised with cash app and its parent company block Inc the business is aiding and abetting criminal Behavior normally banks have to comply with know your customer in anti-money laundering laws known simply in the industry as AML kyc the reason these laws exist is to make it more difficult for criminal organizations to get access to the banking system the laws put the responsibility of knowing their customers identity and source of income in the bank's hands which is why large transactions can be delayed by your bank and why you need to fill out a lot of paperwork to open a checking account cash app had all the functionality of a bank if you go to their website it says that you can send spend bank and buy stocks or Bitcoins but it has an asterisk next to the word bank because that's not what cash app really is it's just a payment processor like venmo PayPal or Zell since it's not technically a bank it doesn't have to meet the same AML kyc standards although under the USA Patriot Act financial institutions are required to collect taxpayer identification numbers such as your Social Security number prepaid cards such as those issued for cash app were determined to fall under the same customer or identification requirements as bank accounts yet cash App Management resisted this requirement according to multiple former employees to create a cash app account someone only needs to provide their phone number or email address a zip code and their name criminals have taken advantage of this by using cash app to receive payment for illicit substances or services and to run scams when Hindenburg was creating their profile for Donald Trump and Elon Musk they noticed that hundreds of other cash app accounts existed under the names of the well-known businessmen the accounts had unique identifiers called hashtags like Trump approved donation in Elon Musk crypto obviously set up to scam unsuspecting people wanting to donate to the former president's political campaign or have their money doubled by Elon Musk look if eating and abetting criminal behavior on massive scale wasn't enough the company should be shut down for creating the term cash tag Society would be better off without them Jack Dorsey is a big fan of hip-hop music which probably motivated his acquisition of title but but it is also made and publicly brag about the cultural impact of cash app at JPMorgan investor conferences because it showed up in the lyrics of so many rap songs we have a very mainstream customer for cash app and the evidence is this I talked about this on a call maybe on the stage before but the number of hip-hop songs that include the phrase cash app or even named Cash app is pretty incredible I think it's over one thousand or two thousand right now Dorsey told the audience in his 2021 presentation the average person that attends a JPMorgan investor conference probably isn't going to be too impressed by rap lyrics but Hindenburg argued that Dorsey shouldn't have been too proud of this cultural impact anyway because most of these songs describe the role of cash app in facilitating criminal activity as part of their report Hindenburg included a playlist of songs mentioned in cash app the third problem that Hindenburg identified in the report was the company culture of turning a blind eye to the problem of fake accounts and illegal activity the company didn't want to ask too many questions because it conflicted with their frictionless banking as described by block CFO former employees revealed through leaked photos that cash Up's clients relationship management software was able to identify individuals using multiple accounts but block would only Blacklist accounts not the actual people making it easy for Bad actors to get back on the platform the company has an incentive to overlook fraudulent accounts because it lets them report higher user numbers and lower per customer acquisition costs than their competitors fraud and illicit transactions also make cash app a lot of money cash up charges a fee for every instant transaction done on the app elicit transactions are normally larger than friends sending each other money to cover a restaurant meal that couldn't be split a large share of cash apps Revenue allegedly comes from a legal activity if they properly crack down on that illegal activity they would have to explain to their shareholders where all the customers and all that Revenue went the proceeds of crime could be taken back from the company if prosecutors ever went after them the fourth problem that Hindenburg presented was that even though cash app allowed so much fraud to take place through their app they weren't even able to make any money off it not all of the fraud was organized professional criminal activity much was actually low-level fraud against the platform itself like people buying stuff online and then claiming they didn't to get their money back monitoring these claims to decide if they are real or not is difficult and expensive at one point cash app would automatically refund any disputed charge under 25 former employees that used to work at Cash app's customer service department said that they would come to recognize the same people that would order food every day using cash app and then charge back that money the employees also said that most of these people were eating much better than they were all at Cash app's expense because it was the company that ended up paying the fifth key Point made by Hindenburg is the way that the founders capitalized on pandemic relief fraud to make themselves billions covid-19 posed an existential threat to Block's business prior to the pandemic over 65 percent of blocks Revenue came from Merchant heavy transaction based fees from stripe their business focused payment processor with small businesses shut down nationwide block faced a collapse of its core Revenue base in response the company shifted its focus to cash app's potential use in pandemic relief one day before the cares Act was signed into law Dorsey tweeted that block was prepared to help distribute government money immediately emphasizing its focus on customers without bank accounts Georgie tweeted the technology exists to get money to most people today even those without bank accounts US Government let us help around 11 million people activated the direct deposit feature on their existing cash up accounts or set up new deposit enabled accounts within weeks of dorsey's tweet helping block report strong metrics at a critical time during blocks May 7 2022 earnings call Dorsey bragged about cash up soaring user growth it later became clear that those new users fell into two groups people that desperately needed the money as quickly as possible and people stealing other people's identities to get the stimulus money because of cash app's loose identification policies suspect transactions at Cash app's partner exceeded those of JP Morgan and Wells Fargo despite those Banks having four to five times as many transaction accounts the positive news about user growth and new Revenue was still enough to push the stock price up to all-time highs where Dorsey and other insiders took the opportunity to sell off billions of dollars worth of their stock to unsuspecting investors that wanted to buy into the bank of the future Dorsey himself made 25 Insider sales between November 2020 and October 2021 while the stock was trading for as high as 277 dollars a share more damning is that during this time where the company was reporting their success to shareholders not a single Insider purchased any shares before the Hindenburg report was released block stock traded 74 percent lower and its highs after the Hindenburg report it is more like 85 percent lower the sixth and final problem highlighted in the Hindenburg report is the real nail in the coffin block is overvalued and could decline by 75 percent even if investors completely ignored the Hindenburg report the research firm reported that despite its Revenue slowdown current unprofitability it's warning a future on profitability and signs of stagnation at Cash app investors have awarded block valuation multiples that price in an expectation of rapid growth the company trades at an Eevee to ebitda multiple of 60x and a 2023 Ford price to earnings ratio of 40x on adjusted earnings by comparison block competitor PayPal trades for an Eevee to ebitda multiple of 16.6 X and 15.1 X adjusted 2023 earnings suggesting a 62 to 72 percent downside for Block were to trade in line with its peers investors either want a company to make money or grow preferably both investors were happy with block slow earnings in the past because it had so many users coming in so they were expecting those earnings to grow but now their user growth is slowing and they are still not earning nearly as much per share as other companies that do the same thing this section of the report ended with the line we are entering a period where the endless hype and unrealistic valuations of past years are beginning to face the financial reality of higher interest rates Hindenburg are not the heroes here if they can convince enough people to sell block shares they make money on their short position so they are going to make a compelling argument investors looking to profit on either side of this trade should be very worried because the report is already priced into the market and the value of the stock could easily go either way from here depending on Block's response if it does end up going bankrupt though it will make a great addition to my new store that's right we have merch now like the slimman brothers Risk Management Department mug or this Madoff Investments internal accounting hoodie if you want to raise a few eyebrows next Casual Friday make sure to check it out it also helps out the channel and makes it possible for everybody to keep on learning how money Works you're a liar you're a liar you know something that you're not telling us you

Channel: How Money Works

Views: 795,412

Keywords: cash app fraud, cash app scam, jack dorsey, hindenburg research, adani, block inc, block inc short, short selling, business, finance, how money works, financial fraud, investing, hindenburg short, jack dorsey scam, stripe payments

Id: 4FWv9qZAJGc

Length: 14min 21sec (861 seconds)

Published: Fri Mar 31 2023