The short-seller that brought down India’s biggest company is now accusing Jack Dorsey’s Block of inflating metrics and servicing criminals

·5 min read
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The activist investment group Hindenburg Research published a report on Thursday announcing that it's shorting payments giant Block, whose products include the digital wallet Cash App and payments platform Square.

The short-seller's announcement detailed numerous allegations against Block, led by Jack Dorsey, the cofounder and former CEO of Twitter. Among other claims, the short-seller alleges that Block, formerly known as Square, has misled investors on key metrics, including its user counts and how much it spends targeting new customers, and has opened up Cash App to criminals, claiming the digital wallet is used for sex trafficking and the trafficking of minors.

"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," Hindenberg wrote.

Hindenburg says its decision to short Block, which follows a two-year-long investigation, is based on interviews with former employees, partners, and industry experts; a review of regulatory and litigation documents; and a series of public records requests.

Block's share price was down approximately 20% early Thursday, dropping from over $72.94 the day before to $59.80 when markets opened. It recovered a bit, to $63.50, around midday.

The sudden drop in the share price of the payments giant, which has made a series of investments in Bitcoin and crypto, comes shortly after it announced strong growth in revenue and gross profit from Cash App and Square in its most recent quarterly earnings report.

Most of Hindenburg’s allegations centered on Cash App, Block’s flagship mobile payments product released in 2013. The app posted 51 million active users last year, a 16% increase from 2021, while gross profits from the app during the fourth quarter also grew to $848 million, a 64% increase from the same period a year earlier. Like other money-transfer apps, including PayPal’s Venmo, use of Cash App surged during the pandemic, and was used to facilitate COVID-relief payments.

"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," Block wrote in a statement. "We will not be distracted by typical short seller tactics."

Block released its annual corporate responsibility report on Wednesday, one day before Hindenburg revealed its short position. In the report, Dorsey wrote: “Throughout 2022 we continued to advance our purpose of economic empowerment” through its products, including Cash App. The report also stated that the company “believes in robust oversight over compliance with laws and regulations."

The giant killer

Hindenburg has made a name for itself betting against unprofitable firms, shell companies, and crypto agencies, but the New York-based short-selling firm stepped up its game earlier this year when it launched an attack on Adani Group, India’s biggest conglomerate.

In January, Hindenburg released a report targeting Adani, the company founded by Gautam Adani with massive holdings in Indian ports, commodities trading, and energy plants. Hindenburg’s report accused Adani of stock manipulation, fraud, and poor leadership, sparking a stock rout that wiped out over $100 billion in Adani’s market value over 10 days.

Adani himself has routinely denied Hindenburg’s accusations, and U.S. investment firms have begun to tentatively bet on his companies again after the Indian conglomerate managed to repay millions in outstanding loans to restore investor confidence in the months since Hindenburg’s short.

Even before bringing down Adani, Hindenburg had made a name for itself as a market mover with several in-depth investigative reports accompanying announcements that it's shorting a company's stock.

In 2020, the investment group published a report on Nikola Corporation, an electric vehicle manufacturer, accusing it of defrauding investors and company founder Trevor Milton of making false statements to partner with larger automakers when the company went public. In 2022, Milton was found guilty for deceiving investors with exaggerated claims about his company's progress in developing zero-emission trucks.

In 2021, after Hindenburg published another report about DraftKings that said it had partnered with a Bulgarian technology company allegedly involved in money laundering, black-market gaming, and organized crime. The Securities and Exchange Commission later subpoenaed the sports-betting operation.

Cash App allegations

In its latest report, Hindenburg wrote that former Block employees said that between 40% and 75% of accounts they reviewed on Cash App were fake, involved in fraud, or one of multiple accounts tied to a single person.

In addition, the short-seller said a series of Department of Justice complaints said Cash App was used in sex-trafficking cases. And it alleged the digital wallet was also used to facilitate fraud related to U.S. government COVID-relief stimulus checks.

To illustrate its point of how Cash App is commonly used for criminal activities, Hindenburg said it had created two clearly fake accounts under the names “Donald Trump” and “Elon Musk,” both of which were deemed legitimate by Cash App. The report also pointed out how the app has entered the cultural zeitgeist with a wave of mentions in popular rap and hip-hop songs, although in many instances artists described using it to “scam, traffic drugs, or even pay for murder,” according to the report. Hindenburg even compiled a video of instances where Cash App was described as being used for criminal purposes in music videos.

Although unwanted attention from Hindenburg has caused companies to collapse and founders to face criminal trials in the past, a damning report from the short-seller is not necessarily a death sentence. Adani Group’s market value recently climbed back to $110 billion from a low of $82 billion earlier this year, The Economist reported last week, after repaying many of its loans and restoring some investor confidence.

Update, March 23, 2023: This article has been updated with a comment from Block.

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