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Hindenburg Research is taking aim at Jack Dorsey’s Block, formerly known as Square, alleging that what the influential short seller called the payments company’s “magical” financial technology relied on something less enchanting: fraud.

Shares of Block, co-founded by Dorsey in 2009, plunged $11.33, or 15.6%, to $61.32 in afternoon trading. 

Hindenburg has raised concerns about other big companies, sometimes with devastating results. The firm, led by Nate Anderson, in 2020 alleged deceptive behavior at electric-vehicle maker Nikola, which eventually led to the resignation and, later, conviction of founder Trevor Milton on charges he had deceived investors. 

More recently, Hindenburg has targeted Indian conglomerate Adani Group, alleging fraud. Adani denies the allegations, calling them “baseless.”

Shares in the conglomerate have suffered massive losses since Hindenburg issued its report alleging fraud and other malfeasance. In trading Monday, the company’s Adani Enterprises gained 4.8% but shares in other Adani listed companies fell between 5% and 20%.

Hindenburg typically works by publishing a negative report about a company, and then, as a short-seller, profiting when that company’s shares decline.

In the case of Block, Hindenburg alleges the company “wildly overstated its genuine user counts and has understated its customer acquisition costs,” while failing to stop users who were engaged in fraud on its platform. Hindenburg said it based its report on dozens of interviews with former employees, partners and experts, Freedom of Information Act and public records requests, and regulatory and litigation records.

“Core to the issue is that Block has embraced one traditionally very ‘underbanked’ segment of the population: criminals,” the report alleges. “The company’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.”

Block denied the allegations in a statement on Thursday, calling Hindenburg’s claims “factually inaccurate and misleading.” The company said it intends to work with the U.S. Securities and Exchange Commission and that it will “explore legal action” against Hindenburg.

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price,” Block said. “We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.”

Block also noted it is subject to regulations and that, as a publicly traded company, regularly discloses information about its business.

Cash App allegations

Hindenburg — named after the airship that famously caught fire and crashed in New Jersey in 1937 — says it specializes in “forensic financial research.” In other words, it looks for corruption or fraud in the business world, such as accounting irregularities and bad actors in management.

The firm’s allegations against Block focus on the company’s Cash App service, a mobile payment tool that lets people transfer money to each other via their phones. According to Hindenburg’s report, the Cash App service facilitates payments for criminal activity, including sex trafficking, as well as fraud. The service was also used in used in pandemic relief fraud, Hindenburg alleged.

The report also claims that Block deliberately ignored evidence of fraud, permitting single accounts to accept unemployment payments on behalf of multiple people or from different states, without verifying addresses. In an another allegation, Hindenburg accused Block of “gouging merchants with elevated fees” and that it “regularly hypes other mundane or predatory sources of revenue as technological breakthroughs,” such as describing its Cash App instant deposit service as working “as if by ‘magic’.”

“In sum, we think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government,” Hindenburg alleged. 

Hindenburg also took aim at Dorsey, who is Block’s chairman, and other top executives, claiming they have sold more than $1 billion in equity. 

—With reporting by the Associated Press.

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