Short Seller Hindenburg Targets Block, Jack Dorsey’s Fintech Company

New York investment firm Hindenburg Research accuses Block of inflating user count, facilitating criminal activities and evading banking regulations in a new report.

Jack Dorsey in an orange shirt.
Jack Dorsey, CEO of Block. MARCO BELLO/AFP via Getty Images

Block, the digital banking and payment company led by Jack Dorsey, is the latest target of Hindenburg Research, the short seller that brought down Indian billionaire Gautam Adani with a report in January.

In a report published today (March 23), Hindenburg alleged Block, formerly known as Square, misled investors with inflated user numbers, facilitated payments for criminal activities, evaded regulation, and marketed predatory banking products as revolutionary technology.

Block shares tumbled nearly 18 percent in today’s morning trading.

“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,” the report said.

The allegations are based on a two-year investigation that involved dozens of interviews with former Block employees, partners and industry experts, Hindenburg said. The firm also conducted extensive review of regulatory and litigation records, and public records requests, it said.

Block said its Cash App, the company’s consumer-facing business, had 51 million active users at the end of 2022. But a large portion of those accounts appear to be fake, Hindenburg’s investigation found. According to former employees, an estimated 40 percent to 75 percent of Block accounts were either fake, involved in fraud, or are additional accounts tied to a single individual, Hindenburg’s report shows.

Block’s CashApp is used in criminal activity, Hindenberg alleges

A lot of the fake accounts on Cash App were used to facilitate criminal activities, including fraud, sex trafficking, and sending Covid-19 relief payments to ineligible recipients during the pandemic. “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,” the report said.

Block’s management willingly ignored internal complaints about criminal activities on its platform in pursuit of user growth and profits, Hindenburg said. Between March 2020 and September 2021, Block’s stock price surged more than 600 percent thanks to a rapid increase in user count.

During that period, CEO Dorsey and his cofounder James McKelvey collectively sold over $1 billion of stock. CFO Amrita Ahuja and Brian Grassadonia, head of Cash App, also cashed out millions of dollars in stock, according to regulatory filings. 

On the business client side, Block avoided “interchange fees,” a transaction fee charged to merchants for accepting various payment cards, by routing payments through a small bank, Hindenburg found. Block’s competitor, PayPal, is under an investigation by federal regulators for similar use of a small bank to avoid transaction fees.

Block said it intends to explore legal action against Hindenburg for the report, which the company describes as factually inaccurate and misleading.

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price,” said Anna Mitchell, a spokesperson for Block, in an email. “We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.”

Hindenburg, based in New York, was founded in 2017 by Nathan Anderson, a former Wall Street hedge fund manager. It belongs to an emerging group of investment firms known as activist short sellers. They aim to uncover financial wrongdoings at publicly traded companies while betting against their stock prices with short positions.

Based on the discoveries of Block, Hindenburg said it has a short position on its stock and believes its share price is inflated by 65 percent to 75 percent.

Short Seller Hindenburg Targets Block, Jack Dorsey’s Fintech Company