Shares of the Jack Dorsey-led payments app Block sank dramatically Thursday after short-seller Hindenburg Research announced the company was its latest short position.
Hindenburg accused Block, formerly known as Square, of allowing criminal activity on the app due to a lack of control bordering on a “Wild West approach to compliance.”
“Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping,” Hindenburg said in a report. Block’s Cash App is primarily designed for unbanked and underbanked customers, who often have more limited financial resources.
Shares of Block dropped more than 13% to $63.03 Thursday morning.
Hindenburg spoke with former employees who described how internal concerns were suppressed and user concerns were ignored, all while “criminal activity and fraud ran rampant on its platform.”
The document included screenshots of Block internal systems and employee communications, including alleged financial misreporting, according to reports.
For example, Hindenburg alleged that as much as 35% of Cash App’s revenue is derived from interchange fees — which would come out to about $892 million in revenue that the short seller said should be capped by law.
Block gets around that cap placed on large financial institutions by routing the revenue through a small bank, Hindenburg said. The short-seller has accused PayPal of using this same method, which led to a Securities and Exchange Commission probe.
A fake Donald Trump
In a remarkable test of Cash App’s verification process, Hindenburg claims to have opened accounts under the names Donald Trump and Elon Musk. A card with Trump’s name arrived in the mail, the firm said.
“Former employees estimated that 40% to 75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual,” the report said.
Additionally, Hindenburg alleged that Block officials inflated Cash App’s transacting user base, an important performance metric.
“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 said.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
Follow him on Twitter @andrew_kessel