Block - Hindenburg Showdown: What You Need to Know

© Reuters.

What’s Happening to Block?

Yesterday, Hindenburg Research released a report announcing that Block Inc (NYSE:SQ) was its latest short position, and accused the company of fraud, financial crimes and unethical practices. 

Block is a FinTech company founded by former Twitter CEO Jack Dorsey, with products like CashApp, Square, AfterPay, and Tidal under its umbrella. 

In its short report, Hindenburg criticized the company in no uncertain terms. 

“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.

The report sent Block shares tanking 15% yesterday. Hindenburg is a powerful adversary. The firm recently short-sold the Adani Group, which wiped out $120 billion of the Indian conglomerate’s market value.

Money Laundering and Criminal Activity 

One of the key accusations in the Hindenburg report is that Block allows and even encourages  criminal activity to flourish on its money-sharing applications like Cash App. The report said that CashApp purposely avoids enforcing money-laundering laws in order  to grow its user base Hindenburg also pointed to Cash App’s lack of oversight over “unbanked” customers, alleging that many of these use the service for criminal and illicit activity. Former employees have noted that internal concerns about such activities were suppressed by management.

Fake Accounts 

Hindenburg also claims that Block deliberately misled investors by artificially inflating its number of users with “fake and duplicate accounts.”  One way in which Hindenburg exposed Cash App’s lack of regulation was by registering an account using the name of president Donald Trump - and receiving a debit card. Former employees estimated that anywhere from 40% to 75% of the accounts they reviewed were fake

Predatory Practices 

Hindenburg also accused the company of unethical practices, noting that “Block has systematically taken advantage of the demographics it claims to be helping. 

The report claims that Block has targeted demographics such as minorities, millennials, and Gen Z with inflated fees and loan rates. For example, Block’s AfterPay has been criticized for charging g harsh late fees on payments after encouraging young people to enter cycles of debt through its buy now pay later program. AfterPay has also faced several class-action lawsuits from consumers accusing Block of misrepresenting its fee structure. 

What has Been Block’s Response? 

In a public statement, Block condemned the report as “factually inaccurate and misleading” information, and said it is exploring legal action against Hindenburg.

Block’s statement asserted,  “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.”