Block, the digital banking and payments company led by Jack Dorsey, is the latest target of Hindenburg Research, the short seller that took down Indian billionaire Gautam Adani with a report in January.
In a report published today (March 23), Hindenburg alleged that Block, formerly known as Square, misled investors with high user numbers, facilitated payments for criminal activities, evaded regulation and marketed predatory banking products as revolutionary technology.
The block shares fell almost 18 percent in today’s morning trading.
“We believe Block misled investors on key figures, and embraced predatory offerings and worst compliance practices to stimulate growth and profit from facilitating fraud against consumers and the government,” the report said.
The allegations are based on a two-year investigation that involved dozens of interviews with former Block employees, partners and industry experts, Hindenburg said. The firm also conducted extensive review of regulatory and litigation and public records requests, it said.
Block said the Cash app, the company’s consumer-facing business, had 51 million active users by the end of 2022. But a large portion of those accounts appear to be fake, Hindenburg’s investigation found. According to former employees, an estimated 40 to 75 percent of Block accounts were either fake, involved in fraud, or additional accounts are linked to a single person, Hindenburg’s report shows.
Block’s CashApp is used in criminal activity, Hindenberg claims
Many of the fake accounts on Cash App were used to facilitate criminal activities, including fraud, sex trafficking and sending Covid-19 relief payments to ineligible recipients during the pandemic. “CEO Jack Dorsey has publicly highlighted how Cash App is mentioned in hundreds of hip-hop songs as evidence of its mainstream appeal. A review of these songs shows that artists generally don’t rap about Cash App’s slick user interface — many describe using it to to defraud, deal drugs or even pay for murder, the report says.
Block’s management willingly ignored internal complaints about criminal activities on its platform in pursuit of user growth and profits, Hindenburg said. Between March 2020 and September 2021, Block’s share price rose by more than 600 percent thanks to a rapid increase in the number of users.
During that period, CEO Dorsey and his co-founder James McKelvey collectively sold over $1 billion in stock. CFO Amrita Ahuja and Brian Grassadonia, head of Cash App, also cashed out millions of dollars in stock, according to regulatory filings.
On the business customer side, Block avoided “interchange fees,” a transaction fee charged to merchants for accepting different payment cards, by routing payments through a small bank, Hindenburg found. Block’s competitor, PayPal, is under investigation by federal regulators for similar use by a small bank to avoid transaction fees.
Block said it intends to explore legal action against Hindenburg over the report, which the company describes as factually inaccurate and misleading.
“Hindenburg is known for this type of attack, which is designed solely to allow short sellers to profit from a falling stock price,” Anna Mitchell, a spokeswoman for Block, said in an email. “We have reviewed the entire report in conjunction with our own data and believe it is designed to mislead and confuse investors.”
Hindenburg, based in New York, was founded in 2017 by Nathan Anderson, a former Wall Street hedge fund manager. It belongs to a growing group of securities firms known as activist short sellers. They aim to uncover financial wrongdoing at listed companies while betting against their stock prices with short positions.
Based on Block’s findings, Hindenburg said it has a short position on the stock and believes the stock price is inflated by 65 percent to 75 percent.
