As short seller Hindenburg Research targeted Jack Dorsey’s payments company, charging it of promoting fraud and “wildly” overstating Cash App users, Block shares fell as much as 20% on Thursday.
Hindenburg claims to have conducted a two-year examination into Block, formerly known as Square, which has a market capitalization of $44 billion.
Block says it is exploring legal action against Hindenburg.
Hindenburg says, “The’magic’ of Block’s business hasn’t been disruptive innovation, but rather the company’s willingness to help consumers and the government commit fraud, avoid regulation, disguise predatory loans and fees as revolutionary technology, and trick investors with inflated metrics.”
Block’s Cash App claims 51 million monthly transacting active users. However, Hindenburg claims to have spoken to former workers who believe that 40% to 75% of the accounts they examined were fraudulent, phony, or additional accounts connected to a single person.
According to the report, which cites a leading non-profit organization, Block has a “Wild West” approach to compliance, and the Cash App has been cited “by far” as the top app used in reported US sex trafficking.
Even Dorsey’s boast that the Cash App is mentioned in hundreds of hip hop songs is attacked by Hindenburg. Most artists don’t rap about how easy Cash App is to use. Instead, they talk about how they use it to scam, sell drugs, or even pay for murder.
More seriously, the report says that Block’s $29 billion purchase of BNPL’s huge Afterpay unit was a “flop” because the unit lost $357 million last year, which is more than the $184 million it lost in 2021.
“In sum, we think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government.”
Block says this in response to a statement:
“We intend to work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today.”
It continues:
“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics.”
