Jack Dorsey’s Block falls after Hindenburg shorts stock

Hindenburg conducted a two-year investigation into Block, it said in a report published on its website and distributed via Twitter

Block Inc. shares tumbled after Hindenburg Research said it’s betting on a decline in the stock, alleging the payments company led by Jack Dorsey facilitated fraudsters who took advantage of government stimulus programs during the pandemic.

Block slumped 20 per cent to $58.31 at 9:46 a.m. in New York, the company’s biggest intraday decline in three years. Block didn’t immediately respond to an email request for comment from Bloomberg News before regular business hours.

Hindenburg, the firm run by Nathan Anderson that bolstered its profile with a scathing report on billionaire Gautam Adani’s business empire earlier this year, conducted a two-year investigation into Block, it said in a report published on its website and distributed via Twitter. Dorsey, Block’s chairman, was a co-founder of Twitter.

Also read | Hindenburg shorts Jack Dorsey's payments firm Block

In its investigation, Hindenburg alleged it found that Block’s wildly popular Cash App was likely facilitating fraudsters taking advantage of government stimulus programs during the pandemic. In response to a public-records request, the state of Massachusetts told the short seller that it sought to claw back over 69,000 unemployment payments from the bank behind Cash App accounts, an amount that exceeded those it sought to reverse from major banks like JPMorgan Chase & Co. and Wells Fargo & Co., which have far more customers.

“Block ignored both internal and external warnings that multiple individuals using the same bank account number to receive government funds was a brazen red flag of fraud,” Hindenburg said in the report. “Multiple key lapses in Cash App’s compliance processes facilitated billions in government payment fraud.”

Hindenburg has targeted about 30 companies since 2020 and their shares lost about 15 per cent on average the next day, according to calculations by Bloomberg News. Six months later, the shares were down 26 per cent on average.

Hindenburg gained more prominence after its Adani report in January, which roiled stocks and bonds from all 10 Adani-related companies. The conglomerate’s flagship Adani Enterprises Ltd. has dropped 48 per cent since the report, even as the group denied Hindenburg’s allegations of accounting fraud and stock manipulation. Hindenburg’s Twitter following has doubled to surpass 500,000.

Hindenburg’s report on electric-vehicle maker Nikola Corp. in September 2020 sent the stock plunging and led to criminal charges against the company’s founder, Trevor Milton. He was convicted in October of defrauding investors.

Anderson’s firm describes itself as a forensic-research outfit operating with its own capital. But it follows the standard procedure for a so-called activist short: After researching a potential target, Hindenburg places a bet that the stock will decline, then trumpets its research publicly, using social media to get the message out.

Block’s status as a stock market darling had already somewhat faded. The firm’s market value peaked at almost $130 billion in 2021, but its shares are down more than 70 per cent since August of that year. Dorsey and co-founder James McKelvey collectively sold more than $1 billion of stock during the pandemic, Hindenburg said in the report.

Investors have long worried about Cash App as well as many of its mobile-money rivals such as PayPal Holdings Inc.’s Venmo, which have faced scrutiny in recent months as scammers have seized the technology to fool consumers into sending them payments. But in its research, Hindenburg alleges Cash App’s problems go deeper and can be traced back to shortcomings in compliance protocols.

Hindenburg alleged that Block was overstating the number of users of Cash App, citing an acknowledgment from the company that “certain of these accounts may share an alias identifier with one or more other transacting active accounts.”

Investors have been on high alert for such activity ever since PayPal last year announced it closed 4.5 million accounts and lowered its forecast for new customers after finding “bad actors” were taking advantage of its incentives and rewards programs. The company abandoned a long-term goal for increasing the number of new users on its platform and now focuses on enticing existing customers to use it more.
Interchange Fees

The short seller also took aim at Block’s collection of so-called interchange fees, which banks collect from merchants each time a consumer swipes a debit card at checkout. That’s one of the key revenue drivers for Cash App, which has an accompanying debit card provided by Sutton Bank.

But big banks have taken aim at large tech companies partnering up with tiny regional lenders for such a business. That’s because Congress has capped what banks such as JPMorgan and Bank of America Corp. can charge for those swipes, while smaller banks aren’t subject to the same rules.

Hindenburg noted that PayPal has disclosed that it’s under investigation by the Securities and Exchange Commission for the practice, though it has no proof that Block faces a similar query.

In the wide-ranging report, the short seller also took aim at Block’s $29 billion purchase of Afterpay. Investors broadly have become more critical of the deal as losses tied to those loans have soared in recent quarters and regulators have taken aim at the underlying business of buy now, pay later.
‘Good Value’

“We view the stock as good value, but are concerned with the prevalence of any criminal activity and how this could impact investor sentiment,” Robert W. Baird & Co. analysts David Koning and Robert Bamberger said in a note to clients about the Hindenburg report. “It’s hard to know exactly what impact this could have, though in a pretty dire case, if they shed 20 per cent of accounts, it could be about 8 per cent of total gross profit impact.”

Cathie Wood’s ARK Investment Management holds 1.66 per cent in Block, according to data compiled by Bloomberg, with the exchange-traded fund buying shares as recently as yesterday. The stock is also the flagship ARK Innovation ETF’s fifth-biggest holding on a weighting basis.

This is not the first time Block has been accused of misleading investors. Last year, a Block shareholder filed a complaint against the company, accusing it of waiting several months to disclose that an ex-employee took customers’ names and brokerage information. The disclosure sent share prices plunging.

Stock owner Donna Esposito specifically accused both Dorsey and Chief Financial Officer Amrita Ahuja of participating in issuing misleading press releases and SEC filings.