Hindenburg Research, an investment research firm focusing 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 payment firm behind Cash App, committed a host of violations, claiming the company has been willing to “facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics.”
The short seller’s report sent shares of Block down as much as 20% before trading opened on Thursday morning, although SQ has bounced back somewhat in afternoon trading.
Short Seller Hindenburg Alleges Major Fraud at Block
In its two-year investigation, Hindenburg found that former Block employees estimated that 40% to 75% of accounts they reviewed were “fake, involved in fraud, or were additional accounts tied to a single individual.”
The report also claims that Block was a breeding ground for illegal activity, enabling 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 rep shared screenshots showing how blacklisted accounts were regularly associated with dozens or hundreds of other active accounts suspected of fraud,” the report states.
Additionally, the report accuses Block of evading financial regulations.
Hindenburg claims that up to 35% of Cash App’s revenue comes from interchange fees, which bring in up to $892 million in revenue that Hindenburg says should be subject to a regulatory cap. Block gets around this cap, according to the report, by routing the revenue through a small bank, the same way PayPal also bypasses the cap, Hindenburg alleges.
Block Says Hindenburg’s Report Is Inaccurate and Misleading
Block responded to Hindenburg’s report in a press release, stating that they plan on exploring legal action against Hindenburg for disseminating the “factually inaccurate and misleading report.”
“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price. We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors,” Block said in a statement.
Block and PayPal have not responded to direct requests for comment and Forbes Advisor cannot verify the accuracy of these findings.
However, Chris Brendler, senior analyst at investment banking firm D.A. Davidson, says that the findings were mostly innocuous. Brendler covers Block.
“Most of the stuff in there wasn’t anything new in terms of valuations,” Brendler says. “It’s a well-known strategy to do things like this. Hindenburg is already letting you know that it’s shorting the stock, so it’s in their best interest to make the report as explosive as possible.”
As for any consequences Block may face for fraud or avoiding interchange fee regulations, Brendler says the fintech giant may get slapped with fees by the Securities and Exchange Commission (SEC) or the Consumer Financial Protection Bureau, but probably not enough to hurt the billion-dollar company.
Stocks Slide After Damning Allegations
Block stock lost 20% of its value—falling to $57.31—in early trading on Thursday following the release of Hindenburg’s damning report. This represents the largest percentage decline in three years. The stock rebounded since the report was released but as of Thursday afternoon was still performing well below its five-day average.
Block Execs Cashed Out During Pandemic High
Block shares skyrocketed during the pandemic, rising 639% in 18 months. According to Hindenburg, co-founders Jack Dorsey and James McKelvey “collectively sold over $1 billion of stock during the pandemic. Other executives, including CFO Amrita Ahuja and the lead manager for Cash App Brian Grassadonia, also dumped millions of dollars in stock.”
Brendler says that there’s nothing abnormal about Dorsey and other executives selling stocks during Block’s pandemic surge: “It’s a perfectly normal thing to do to sell when a stock has a huge run.”
Five Services Block Owns
Block, a mobile payments firm founded by startup veterans Dorsey (Twitter) and McKelvey (LaunchCode), owns five companies that focus on buyer and seller ecosystems.
Over the past few years, Block has made acquisitions to expand its fintech commerce and cashless payment presence both domestically and internationally:
Afterpay: a buy now, pay later trailblazer acquired in January 2022
Stitch Labs, Inc.: a cloud-based inventory management and marketplace company for small- and mid-size 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 artificial-intelligence-enabled chat service to assist and replace live-chat customer support agents at e-commerce companies