Hindenburg Research has once again published an absolute bombshell, this time accusing Jack Dorsey’s Block Inc of misleading its investors. Picture Getty
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Short seller firm Hindenburg Research has once again published an absolute bombshell, this time accusing Jack Dorsey’s Block Inc (ASX:SQ2) of misleading its investors and engaging in predatory lending practices.
Block shares, which are listed both in NYSE and the ASX, plunged 15% on NYSE overnight as the company threatened to sue.
There’s a bunch of concerning things in this extremely lengthy report if you have the time to read, but the gist of the claim is that Block allowed criminal activity to operate with lax internal controls.
Hindenburg also said that Block “highly” inflates its Cash App’s transacting user base, a key metric of the company’s performance.
The short seller claimed the platform has been overrun with scam accounts and fake users, according to numerous interviews with former employees who estimated that 40%-75% of accounts were fake or involved in fraud.
Examples of obvious distortions abound such as “Jack Dorsey” having multiple fake accounts, while “Elon Musk” and “Donald Trump” have dozens.
To test that it was easy to open fake accounts, Hindenburg said that it changed its own accounts on Cash App into “Donald Trump” and “Elon Musk”, and was easily able to send and receive money.
“We ordered a Cash Card under our obviously fake Donald Trump account, checking to see if Cash App’s compliance would take issue — the card promptly arrived in the mail,” said the report.
Because of these fake accounts, Hindenburg believes that Block has wildly overstated its genuine user counts, and understated its customer acquisition costs.
Hindenburg also claimed that Block has systematically taken advantage of the demographics it claims to be helping.
“The magic behind Block’s business has not been disruptive innovation, but rather the company’s willingness 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,” it said.
Hindenburg says that Block’s “Wild West” approach to compliance made it easy for bad actors to mass-create accounts for identity fraud and other scams, then extract stolen funds quickly.
“Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user,” the report said.
A former Block customer service rep shared screenshots showing how blacklisted accounts were regularly associated with hundreds of other active accounts suspected of fraud.
“This phenomenon of allowing blacklisted users was so common that rappers bragged about it in hip hop songs,” said Hindenburg.
Rapper “Nuke Bizzle” for example made a popular music video about committing COVID fraud using Cash App, for which he was arrested.
The lyrics to the song “Precise” by Money Man also described filling mailboxes in an Atlanta neighborhood with Cash App cards:
“I’m the reason why the block hot.”
“Ima put a Cash App card in every Pine Hills mailbox.”
“If I get locked up, I’m runnin’ my cell block”
In all, Hindenburg listed 5 Compliance Lapses against Block, the culmination of what the short seller said was a two-year undercover research effort made by the firm.
Afterpay, which is now part of Block, was also mentioned numerous times in the report.
Hindenburg didn’t imply any wrongdoing by Afterpay, but said that Block’s US$29 billion deal to acquire the BNPL company in 2021 has been a disaster.
“Afterpay was designed in a way that avoided responsible lending rules in its native Australia, extending a form of credit to users without income verification or credit checks,” said the report.
“The service doesn’t technically charge ‘interest’, but late fees can reach APR equivalents as high as 289%.”
Hindenburg said the acquisition has been a major flop, pointing to the fact that in 2022, the year Afterpay was acquired, it lost US$357 million, accelerating from 2021 losses of US$184 million following a huge increase in delinquencies.
Hindenburg concludes that it’s seeing a huge downside in Block Inc shares.
“On a purely fundamental basis, even before factoring in the findings of our investigation, we see downside of between 65% to 75% in Block shares,” said Hindenburg.
The discreet New York based company was founded in 2017 by short-selling activist, Nathan Anderson.
Anderson worked as an ambulance driver in Israel and attended classes at Hebrew University, before beginning his financial career working for FactSet Research Systems.
Hindenburg has previously published scathing reports on electric vehicle company Nikola, Lordstown Motors, and most recently the Adani Group which caused a US$150bn wipeout in the Indian conglomerate.
Now read: The Secret Broker: Who’s got a burning ring of fire to deal with this week?
Hindenburg is a pure short seller, which means it makes money by betting a stock will decline in value.
Critics say that short sellers distort the market, and that their practices can sometimes cross into the grey area of market manipulation.
Hindenburg for its part has always maintained that its goal is to keep markets and companies honest.
