Block shares tumble 17 per cent amid short-seller claims of ‘Wild West’ compliance

A short-seller has taken aim at Block, sending the stock down 15 per cent on Thursday and another 2 per cent on Friday. Hindenburg Research took aim at Block’s ethics, challenged key data points surrounding Cash App’s user numbers and ultimately challenging its mission to help the unbanked.

Hindenburg Research is a prolific short seller and profits from a falling stock price. Nevertheless, investors heeded its warning on Block, fleeing the stock on a day when the broader markets finished higher. The activist firm says it performed a two-year investigation into Block, resulting in accusations of fraud and predatory lending practices. 

NEW FROM US: Block—How Inflated User Metrics and "Frictionless" Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billionhttps://t.co/pScGE5QMnX

— Hindenburg Research (@HindenburgRes)

Block has struck back, calling the report “factually inaccurate” and “misleading” and saying it intends to work with the US SEC to explore legal action against the short-seller. Jack Dorsey’s company noted that Hindenburg Research has a history of similar attacks, a tactic it uses to profit from a falling share price.

One of the other companies Hindenburg has gone after is electric vehicle maker Nikola Corp, resulting in the resignation of the company's founder. 

After examining the report against its own data, Block says the claims are “designed to deceive and confuse investors,” pointing out that it is a highly regulated company. 

Two-Year Probe

While Block’s mission involves supporting the unbanked and underbanked demographics, the researchers accuse the company of instead taking advantage of this segment of the population. Worse, they claim that Block is guilty of fraud against both consumers and the government, bypassing regulation and disguising predatory loans as breakthrough technology. 

Hindenburg’s research involved speaking to ex-Block employees, who may or may not have an axe to grind with their former employer. Nevertheless, the report goes on to allege that Block has reported “inflated metrics” around its Cash App platform. 

Block’s Cash App product has been a bright spot for Wall Street analysts. They predict that robust active user growth combined with low acquisition costs will fuel margin growth and serve as a catalyst for more innovation. However, Hindenburg quashes that analysis, suggesting that the company has a habit of overstating its user counts and understating its customer acquisition costs. 

Former employees claim that between 40 per cent and 75 per cent of accounts they observed were either a fake, fraud-ridden or one of multiple accounts tied to one person. 

Short-sellers have been rewarded since Hindenburg’s report was published. However, Block’s stock is still up about 15 per cent year-to-date despite being a far cry from its all-time high of over $250 reached in 2021.