Block, Inc. Shares Fall Amid Allegations of Multiple Breach – Forbes Advisor

Hindenburg Research, an investment research firm focused on short selling, released a damning report on Jack Dorsey’s fintech firm Block Inc (SQ) – formerly known as Square.

The report alleges that Block, the payments company behind Cash App, committed a series of violations, claiming that the company has been willing to “facilitate consumer and government fraud, avoid regulation, dress up predatory loans and fees as revolutionary technology and mislead investors with inflated calculations.”

The short seller’s report sent shares of Block down as much as 20% before trading opened Thursday morning, although SQ has retreated somewhat in afternoon trading.

Short Seller Hindenburg Alleges Major Fraud at Block

In his two-year investigation, Hindenburg found that former Block employees estimated that 40% to 75% of the accounts they reviewed were “fake, involved in fraud, or were additional accounts linked to a single individual.”

The report also claims that Block was a breeding ground for illegal activity, allowing criminals caught in fraud or other prohibited activities to continue creating accounts even after they were caught.

“Block blacklisted the account without banning the user. A former customer service representative shared screenshots showing how blacklisted accounts were regularly associated with dozens or hundreds of other active accounts suspected of fraud,” the report said.

In addition, the report accuses Block of evading financial regulations.

Hindenburg claims up to 35% of Cash App revenue comes from interchange fees, which generates up to $892 million in revenue that Hindenburg says should be subject to a regulatory cap. Block gets around this limit, according to the report, by routing revenue through a small bank, the same way PayPal also bypasses the limit, Hindenburg claims.

Block says Hindenburg’s report is inaccurate and misleading

Block responded to Hindenburg’s report in a press release, stating that they plan to explore legal action against Hindenburg for spreading the “factually inaccurate and misleading report.”

“Hindenburg is known for this type of attack, which is designed solely to allow short sellers to profit from a falling share price. We have reviewed the entire report in conjunction with our own data and believe it is designed to mislead and confuse investors,” Block said in a statement.

Block and PayPal did not respond to direct requests for comment, and Forbes Advisor cannot confirm the accuracy of these findings.

However, Chris Brendler, senior analyst at investment banking firm DA Davidson, says the findings were largely harmless. Brendler covers Block.

“Most of the stuff in there was nothing new in terms of valuations,” says Brendler. “It’s a well-known strategy to do things like this. Hindenburg is already letting you know that it is shorting the stock, so it is in their best interest to make the report as explosive as possible.”

As for any repercussions Block could face for fraud or evading interchange fee regulations, Brendler says the fintech giant could face charges from the Securities and Exchange Commission (SEC) or the Consumer Financial Protection Bureau, but probably not enough to hurt the billion- dollar company.

Shares plummet after damning allegations

Block shares lost 20% of their value – falling to $57.31 – in early trading Thursday following the release of Hindenburg’s damning report. This is the largest percentage decrease in three years. The stock recovered since the report was released, but was still well below its five-day average on Thursday afternoon.

Block leaders were paid out during Pandemic High

Block stocks soared during the pandemic, rising 639% in 18 months. According to Hindenburg, co-founders Jack Dorsey and James McKelvey “collectively sold over $1 billion in stock during the pandemic. Other executives, including CFO Amrita Ahuja and Cash App CEO Brian Grassadonia, also dumped millions of dollars in stock.”

Brendler says there’s nothing abnormal about Dorsey and other executives selling shares during Block’s pandemic surge: “It’s a perfectly normal thing to do to sell when a stock has a big rally.”

Five Services Block Owns

Block, a mobile payments company founded by startup veterans Dorsey (Twitter) and McKelvey (LaunchCode), owns five companies focused on buyer and seller ecosystems.

Over the past few years, Block has made acquisitions to expand its fintech commerce and cashless payment presence both nationally and internationally:

• Postpayment: a buy now pay later trailblazer purchased in January 2022
• Stitch Labs, Inc.: a cloud-based inventory management and marketplace company for small and medium-sized brands
• Weebly Inc.: a website building platform and web hosting service provider
• Verse Technologies Inc.: a Spanish peer-to-peer (P2P) payment platform
• Eloquent Labs: an AI-enabled chat service to assist and replace live chat customer support agents at e-commerce companies