Activist short seller accuses Cash App of facilitating fraud

Hindenburg Research, a firm that made waves for betting against Adani Group in January, alleged in a new report that Block misrepresented to investors the number of people using the Cash App and the cost of acquiring them. Hindenburg also alleged that users transacted through the Cash App for illegal activity and helped facilitate fraud related to covid-19 aid.

“Former employees described how Cash App suppressed internal concerns and ignored user requests for help as criminal activity and fraud ran rampant on the platform,” the report claimed. It further wrote that former employees interviewed estimated that between 40 percent to 70 percent of the accounts are “fake, involved in fraud, or were additional accounts linked to a single individual.”

Hindenburg said it took a short position on Block, meaning it is betting against the company’s share price.

The report comes amid growing visibility for the Cash App. By 2022, there were 51 million monthly active users, acquiring them for “$10 or less on average,” Block’s chief financial officer, Amrita Ahuja, said in February.

Block, which was founded by Twitter founder Jack Dorsey, did not immediately respond to a request for comment. Shares fell by around 14 per cent mid-day, slightly up from a 19 per cent fall immediately after the report’s release.

Block began as the payments company Square, which became known for its distinctive white touchscreen registers and card readers. But as the pandemic shuttered self-employed businesses, Cash App flourished as many users deposited their federal stimulus checks into the app’s digital wallets, as the Wall Street Journal reported.

Yet with Cash App’s popularity came reports of fraud, which also plagued rival payment apps like Zelle and Venmo.

What was particularly egregious, according to the Hindenburg report, is that Cash App ignored concerns from employees and regulators about the “rampant” fraud on the platform in “an apparent attempt to preserve the growth engine.”

Hindenburg was founded by Nate Anderson, an activist short seller who has rapidly risen to prominence in recent years. Activist short sellers are controversial: Some see them as unsavory actors because their success depends on a company’s failure. But others say they are important players driven by high financial rewards for exposing corporate fraud.

In January, Hindenburg took a short position in the Adani Group, an Indian conglomerate owned by one of Asia’s richest men. At the time, Hindenburg released a report accusing Adani of artificially boosting its share price by using a network of foreign shell companies. Adani denied the allegations, but shares fell on the release and months later the company remains in conflict.

The Hindenburg also made waves in 2020, when shares in electric car maker Nikola plummeted after it was accused of misrepresenting its technology. Hindenburg took a short position on Nikola, and investigations by the Justice Department and securities regulators followed. Nikola’s founder was later convicted of fraud charges.