US-based short seller Hindenburg Research has released a critical report on American mobile payments company Block Inc, headed by Twitter co-founder Jack Dorsey. The report, released on Thursday, claims the payments firm overstated its user accounts, understated its customer acquisition costs, allowed criminal activity to operate with lax controls and strategically avoided regulations.

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Hindenburg Research, which previously released a sensational report on India's Adani Group, said in its latest report that former Block employees estimated that 40 to 75 percent of accounts on the company’s platforms were fake, involved in fraud, or were additional accounts linked to a single individual.

Shares of Block plunged nearly 15 percent by Thursday’s close after the report was released, CNBC reported.

What is Block?

Block Inc, formerly known as Square Inc, is a payment firm with a $44 billion market cap. The company claims to have built a 'frictionless' and 'magical' financial technology which enables payments without a bank account to work towards a mission to empower the 'unbanked' and the 'underbanked'.

Block is the developer of Cash App, a mobile payment service available in the US and the UK that allows users to transfer money using a mobile phone app.

What are the allegations against Block Inc?

In its report Hindenburg has alleged that Block has systematically taken advantage of the demographics that it claims to help and accused Block of facilitating fraud against consumers and the government. It further states that Block avoided regulation, disguised predatory loans and fees as a revolutionary technology, and strategically misled investors with inflated user metrics.

In its two-year investigation, Hindenburg spoke with multiple former employees who explained how internal concerns were suppressed and user concerns were ignored and alleged that “criminal activity and fraud ran rampant on its platform.”

The report includes screenshots of internal systems and employee messages which highlight the alleged financial misreporting.

According to the report, Block harboured criminals and its lax controls made it easy for bad actors to mass-create accounts for identity fraud and extract stolen funds.

As per the report, former Block employees estimated that 40 to 75 percent of accounts on the Cash App, reviewed by Hindenburg, were fake or were additional accounts linked to a single individual.

Hindenburg also alleged that Block quietly fuelled its profitability by avoiding a key banking regulation to charge “Interchange fees” from merchants for accepting use of various payment cards.

A law passed by the US Congress caps “interchange fees” charged by large banks that have over $10 billion in assets. But Block, despite having $31 billion in assets, avoided regulations and routed the revenue through a small bank.

Hindenburg alleged that up to 35 percent of Cash App’s revenue is derived from interchange fees, and around $892 million of Block Inc’s revenue should be capped by law.

Block’s response

Block Inc has released a response to the report and trashed the allegations of Hindenburg Research stating that it was exploring legal action against the short seller.

The company alleged that Hindenburg’s report on its Cash App business was "factually inaccurate and misleading” and it was "designed to deceive and confuse investors,” as per a Business Wire report.

Block further claimed that Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declining stock price.

https://www.businesswire.com/news/home/20230323005636/en/

https://www.cnbc.com/2023/03/23/block-shares-plunge-after-hindenburg-says-jack-dorseys.html

https://twitter.com/HindenburgRes/status/1638881786343063553

https://economictimes.indiatimes.com/news/international/business/hindenburg-shorts-jack-dorseys-payments-firm-block/articleshow/98945341.cms

https://www.businesstoday.in/latest/corporate/story/what-is-block-cash-app-and-what-are-hindenburgs-accusations-against-jack-dorsey-374610-2023-03-23

https://www.cnbc.com/2023/03/23/block-shares-plunge-after-hindenburg-says-jack-dorseys.html

(Edited by : C H Unnikrishnan)

First Published:Mar 24, 2023 2:15 PM IST