Shares in Block plunged by as much as 20% on Thursday after short seller Hindenburg Research set its sights on Jack Dorsey's payments firm, accusing it of facilitating fraud and "wildly" overstating Cash App users.
Hindenburg says that it has carried out a two-year investigation into Block, formerly called Square, which has a $44 billion market capitalisation.
Block says it is exploring legal action against Hindenburg.
"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," says Hindenburg.
Block's Cash App claims 51 million monthly transacting active users. But, Hindenburg says it has spoken to former employees that estimate that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.
Block has a "Wild West" approach to compliance and the Cash App has been cited “by far” as the top app used in reported US sex trafficking, says the report, citing a leading non-profit organisation.
Hindenburg even takes aim at Dorsey's boast that the Cash App is mentioned in hundreds of hip hop songs. The "artists are not generally rapping about Cash App’s smooth user interface — many describe using it to scam, traffic drugs or even pay for murder".
More seriously, the report says that Block's $29 billion takeover of BNPL giant Afterpay is "flopping," with the unit losing $357 million last year, up from 2021 losses of $184 million.
"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."
In a statement,, Block responds: "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."
It continues: "We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics."
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