Hindenburg fallout: Shares of Jack Dorsey's Block Inc crash 20%

American payment firm Block Inc on Thursday lost nearly 20 per cent in market capitalisation following a scathing report by US short-seller Hindenburg Research. Hindenburg today accused Block and its co-founder & CEO Jack Dorsey of indulging in fraud against consumers and the government and misleading investors with inflated metrics. The short seller also alleged that the payment firm has systematically taken advantage of the demographics it claims to be helping.

Following the report, Block Inc's shares plunged by nearly 20 per cent and were trading at $58.55( till 10:04 am in New York).  The stock closed at $72.94 on Wednesday. Today, the shares opened at $60, down nearly 20 per cent. 

Block, formerly known as Square, is a company with a $44 billion market capitalisation. The short seller said that the payment firm claims to have developed a 'frictionless' and 'magical' financial technology with a mission to empower the 'unbanked' and the 'underbanked. However, the report said that the 'magic' behind the company's business had not been disruptive innovation, but rather its "willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as a revolutionary technology, and mislead investors with inflated metrics".

Hindenburg also claimed that Block’s Cash App platform had wildly overstated its genuine user counts and had understated its customer acquisition costs. "Former employees estimated that 40 per cent-75 per cent of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual," it alleged.

The short seller said former employees described how Cash App suppressed internal concerns and ignored user pleas for help as criminal activity and fraud ran rampant on its platform. "This appeared to be an effort to grow Cash App’s user base by strategically disregarding Anti Money Laundering (AML) rules," the report said.

The report accused Dorsey of making money by dumping stocks of the company when they surged during the pandemic time. It said Block reported a 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 per cent 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 said.