Dive Brief:

• Cash App parent Block has set aside $240 million as it negotiates a potential legal settlement with the Department of Justice related to allegations of compliance shortcomings detailed in a 2023 short seller’s report.
• In March, the DOJ presented Block with “potential terms for resolving this matter,” the company disclosed May 7 in its quarterly filing with the Securities and Exchange Commission. Block said it “disputes the basis and methodology underlying the DOJ's assessment of the matter.” The company made a counterproposal to DOJ officials in April and “discussions are ongoing,” Block said in the filing.
• Block also said the SEC notified it in March that the federal agency had ended its investigation and “did not intend to recommend an enforcement action.” Spokespeople for Block and the department did not respond to emails Wednesday seeking comment.

Dive Insight:

The SEC and Justice Department sought information from Block following the publication of a March 2023 report by Hindenburg Research, alleging that Cash App was a platform for criminal activity with lax fraud controls that resulted in duplicative accounts and fraudulent payments.

In its filing, Block did not articulate the issues that federal authorities may be investigating, referencing only “the publication of a short seller report in March 2023.”

The company said it cannot predict an outcome of the DOJ matter and that it’s "reasonably possible that the ultimate resolution could result in losses in excess of the amount accrued and such losses could be material.”

Block had “a pattern of disregard” for anti-money laundering and “know your customer” laws, according to the Hindenburg report, which the firm said was based on more than a dozen interviews with former Block employees during its two-year investigation.

Block, based in Oakland, California, disputed the report and threatened legal action, calling it “factually inaccurate and misleading.”

The now shuttered New York-based Hindenburg, which billed itself as a stock research and investment firm, also disclosed a short position in Block shares at the time of its report. A short seller takes positions that profit from the decline in a company’s shares. The investment firm closed last year.

Cash App has faced regulatory scrutiny from state and federal authorities for several years over its business practices. 

Last year, Block agreed to pay $255 million in a settlement with state and federal regulators – including the Consumer Financial Protection Bureau and 48 states – over weak security protocols in the app, leading to consumer fraud losses. The company also paid $40 million to New York financial regulators last year in a separate civil enforcement action.

Block was founded 17 years ago by Jack Dorsey, a billionaire technology entrepreneur who also founded Twitter. He still leads the company. Besides Cash App, Block owns the Square point-of-sale business; Afterpay, a buy now, pay later provider; and Tidal music service.