Shares of Jack Dorsey’s Fintech Block plunged about 18% this week after short-seller Hindenburg Research accused the company of systematically facilitating fraud and violate regulatory rules.
Jack Dorsey launched one of the largest banking apps, primarily used in the U.S. According to its data, the cash app serves more than 51 million customers; they buy shares or pay with the associated credit card. Block also offers Bitcoin trading. In addition, it acknowledged “Buy Now, Pay Later” provider Afterpay for $29 billion in 2021. Business boomed, and Block was seen as a flagship fintech. It was looking to expand into Europe.
On Thursday, controversial short-seller Hindenburg Research released a report accusing Block of artificially inflating its user numbers and enabling fraudulent transactions. The stock price plummeted as a result.
The company has already been criticized in recent years for scam activities. Criminals wanted to trick users into sending them money via Block’s app under false pretenses. The number of such cases exploded during the corona pandemic.
According to the U.S. Competition and Consumer Protection Commission (FTC), complaints against Cash App have increased by 472% in one year, from 735 complaints in 2019 to 4204 in 2020. The numbers are far higher than those of competitors like Paypal or Zelle.
But that’s already priced into Block’s stock, and the issues are already well-known. Hindenburg Research now claims Cash App’s compliance issues are even more significant than previously known. The short-seller describes Block’s internal systems as having a “Wild West” approach to compliance.
He said a two-year investigation found that Block “systematically exploited” its customers. The “magic” behind Block’s business, he said, was not “breakthrough innovation” but the company’s willingness to facilitate fraud on consumers and the government, evade regulatory rules, and mislead investors with inflated metrics. Former employees would assume that 40 to 75% of the accounts they reviewed were fake or involved in fraud or were additional accounts linked to a single individual.
Hindenburg Research based its findings on interviews with “dozens of former employees, partners and industry experts, extensive review of regulatory and litigation records, and documents from government agencies.”
Block responded in the evening with a statement. The company is considering legal action against Hindenburg Research for “the factually incorrect and misleading report.” Jack Dorsey’s company said that Hindenburg is known for these attacks aimed solely at allowing short-sellers to profit from a falling stock price. “We have reviewed the full report in the context of our data and believe it is designed to deceive and confuse investors.”
The New York-based short-seller gained notoriety in 2020 when he claimed mobility startup Nikola was a scam. Earlier this year, Hindenburg Research accused Indian billionaire Gautam Adani of committing “the largest fraud in corporate history.” The report reduced the market value of his empire by about $100 billion. Adani, previously the world’s third richest man, denied the allegations.