April 24, 2024

Hindenburg Research, the small investment firm whose major research reports have hammered shares of an Indian industrial conglomerate and an electric-vehicle startup, has found its latest target: Jack Dorsey’s fintech firm Block.

Hindenburg published a 17,600 word report Block on Thursday accused Block of inflating its user base and failing to stamp out fraudulent and illegal activity on its platform — especially its mobile payments service, Cash App.

Hindenburg wrote in its report: “We believe Block misled investors on key metrics and employed predatory products and compliance worst practices to drive growth and benefit from facilitating fraud against consumers and governments. Profit.”

Shares of Block fell nearly 20% in early trading following the report. Representatives for Block did not respond to a request for comment.

Block has become the latest prominent target of criticism from Hindenburg, whose business revolves around publishing research reports that scathingly evaluate companies — and then, often, betting that their shares will fall, a practice known as short selling.

A Hindenburg report wiped billions of dollars off the market value of Adani Group, the industrial conglomerate founded by Indian billionaire Gautam Adani. Hindenburg’s allegations of fraud against electric truck maker Nikola eventually led to the ouster and criminal prosecution of the company’s CEO, Trevor Milton.

Block was founded in 2009 by Mr. Dorsey and Mr. Jim McKelvey and will be called Square until late 2021. It started out as a platform for merchants to make credit card payments, eventually adding Cash App, and “pay as you go” through acquisitions – later platform Afterpay and streaming music service Tidal.

Hindenburg wrote in his report that Block’s Cash App platform was riddled with fake accounts that artificially inflated user numbers. Even more worrisome, short sellers say there is a lot of criminal activity on Cash App, including payments for illegal drug sales and sex trafficking. (Unusually, Hindenburg cites evidence few rap lyrics Describe the use of Cash App to pay for drugs or assassination attempts. )

The investment firm also cited statistics from state governments such as Massachusetts and Ohio showing that Cash App has been used at a higher rate than other banking services for fraudulent pandemic relief applications. The report also accused Block executives of ignoring warnings from employees and regulators about signs of potential pandemic relief fraud.

The rise in Block’s stock price during the pandemic, which the company attributes to a surge in online shopping — but which Hindenburg said was partly based on fraudulent activity on its platform — prompted executives such as Mr. Dorsey to sell value Multi-million dollar stocks.

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