Block Shares Fall As Hindenburg Accuses Company Of “Fraud Facilitation”, Says Shares Could Fall 65% To 75%

Shares of Jack Dorsey’s Block fell about 10% this morning after short seller Hindenburg Research said it was short the name, accusing the company of “facilitating fraud”. 

“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,” the short seller wrote.

The short seller, recently most well known for targeting Asia’s richest man Gautam Adani, is now setting its sights on another billionaire in Dorsey, who has a reported net worth near $5 billion.

The outlet, led by Nathan Anderson, published a report called “Block: How Inflated User Metrics and “Frictionless” Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion”. 

“Most analysts are excited about the post-pandemic surge of Block’s Cash App platform, with expectations that its 51 million monthly transacting active users and low customer acquisition costs will drive high margin growth and serve as a future platform to offer new products,” the short seller wrote.

In context, this is the lowest price since the end of last year…

“Our research indicates, however, that Block has wildly overstated its genuine user counts and has understated its customer acquisition costs. Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.”

“Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user,” Hindenburg writes. “Block obfuscates how many individuals are on the Cash App platform by reporting misleading “transacting active” metrics filled with fake and duplicate accounts. Block can and should clarify to investors an estimate on how many unique people actually use Cash App.”

The company said it “filed public records requests to learn more about Block’s role in facilitating pandemic relief fraud and received answers from several states,” claiming that “Massachusetts sought to claw back over 69,000 unemployment payments from Cash App accounts just four months into the pandemic. Suspect transactions at Cash App’s partner bank were disproportionate, exceeding major banks like JP Morgan and Wells Fargo, despite the latter banks having 4x-5x as many deposit accounts.”

The report continues: “CEO Jack Dorsey has publicly touted how Cash App is mentioned in hundreds of hip hop songs as evidence of its mainstream appeal. A review of those songs show that 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.”

“In an apparent effort to preserve its growth engine, Cash App ignored internal employee concerns, along with warnings from the Secret Service, the U.S. Department of Labor OIG, FinCEN, and State Regulators which all specifically flagged the issue of multiple COVID relief payments going to the same account as an obvious sign of fraud,” Hindenburg writes.

“Block reported a pandemic surge in user counts and revenue, ignoring the contribution of widespread fraudulent accounts and payments. The new business provided a sharp one-time increase to Block’s stock, which rose 639% in 18 months during the pandemic. As Block’s stock soared on the back of its facilitation of fraud, co-founders Jack Dorsey and James McKelvey collectively sold over $1 billion of stock during the pandemic. Other executives, including CFO Amrita Ahuja and the lead manager for Cash App Brian Grassadonia, also dumped millions of dollars in stock.”

The report concludes

• 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.

• We also believe Jack Dorsey has built an empire—and amassed a $5 billion personal fortune—professing to care deeply about the demographics he is taking advantage of. With Dorsey and top executives already having sold over $1 billion in equity on Block’s meteoric pandemic run higher, they have ensured they will be fine, regardless of the outcome for everyone else.

You can read the full report here. We will add any response from Block if and when it becomes available.