Hindenburg Research shorts Jack Dorsey's payments firm Block

US short seller Hindenburg Research said on Thursday it held short positions in Jack Dorsey's payments firm Block Inc for "wildly overstating its genuine user counts and understating its customer acquisition costs". Dorsey, Block’s chairman, was a co-founder of Twitter, the social media platform in which Hindenburg took a long position last year.

The US short seller’s report comes two months after its explosive allegations against Adani Group wiped more than $100 billion off the conglomerate’s market value.

Dorsey, who co-founded Block in 2009 in his San Francisco apartment with the goal to shake up the credit card industry, is Block's largest shareholder with a stake of around 8%.

The NYU dropout was just until two years ago splitting his time between the payments firm and Twitter, his other venture that went private in 2022 in a $44 billion buyout by Elon Musk that Dorsey supported.

'Our research indicated that Block has wildly overstated genuine user counts and understated its customer acquisition costs,' said Hindenburg Research. Hindenburg accused Jack Dorsey's company of 'frictionless' fraud and claimed the firm inflated user metrics, and enabled insiders to cash out over $1 billion.

"Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping," the short seller said in a note published on its website. Block's shares declined 20% to $58.35 at 9:54 am in US markets after the report.

Hindenburg added that Block, which has a market cap of $44 billion, "obfuscates" how many individuals are on the Cash App platform by reporting misleading "transacting active" metrics filled with fake and duplicate accounts.

Hinderburg added that co-founders Jack Dorsey and James McKelvey collectively sold over $1 billion of stock during the pandemic as the company's share price soared.

Other executives including CFO Amrita Ahuja and the lead manager for Cash App, Brian Grassadonia, also dumped millions of dollars in stock, the report added.

The research firm said that Block’s Cash App thrived on serving 'unbanked' customers. Cash App allows individuals to quickly receive and send money to other people from their mobile devices. In addition to mobile banking, Cash App also offers the option to purchase stock and Bitcoin through its platform.

The report alleges those unbanked customers were involved in criminal or illicit activity. Hindenburg also alleged that Cash App’s compliance programs were deficient and examples of "obvious distortions" abounded.

The short seller had opened accounts in the name of former President Donald Trump and Tesla CEO Elon Musk, and then opened a Cash App card, called the Cash Card, under the “obviously fake Donald Trump account,” the report said.

ALSO READ: What is Block, Cash App and what are Hindenburg's accusations against Jack Dorsey?

The card bearing Trump’s name arrived “promptly” in the mail.

“Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual,” the report said.

Hindenburg alleged multiple key lapses in Cash App's compliance processes facilitated billions in government payment fraud.

Block had obvious compliance lapses that made fraud easy, such as permitting single accounts to receive unemployment payments on behalf of multiple individuals from various states and ineffective address verification, said Hindenburg

Founded in 2017 by Nathan Anderson, Hindenburg is a forensic financial research firm that analyses equity, credit and derivatives. Hindenburg invests its own capital and takes short-positions against companies. After finding potential wrongdoings, the company usually publishes a report explaining the case and bets against the target company, hoping to make a profit.

About 5.2% of Block's free float shares were in short position as of March 22, according to Ortex data. The company's ticker was third most trending on retail investor focused forum StockTwits.

Last month, Block said it is "meaningfully slowing" the pace of hiring this year to control costs.

With inputs from Reuters