Block Inc SQ shares are tanking in early trading Thursday after short seller Hindenburg Research put out a bearish report on the company.
'Magic' Or 'Fraud' At Block? On Wednesday, Hindenburg took to Twitter to announce that "another big one" was coming. The short seller wasn't kidding. After targeting Indian multinational holding company Adani Group in January, the firm now has former Twitter CEO Jack Dorsey in its crosshairs.
"Block Inc., formerly known as Square Inc., is a $44-billion market cap company that claims to have developed a 'frictionless' and 'magical' financial technology," Hindenburg wrote in a new report.
Following a two-year investigation into the company, the short seller is alleging that Block is taking advantage of the people it claims to be helping. What Block calls "magic," it calls "fraud."
Hindenburg alleges Block has intentionally misled investors by disguising "predatory" loans and fees as revolutionary technology, citing dozens of interviews with former employees, partners and industry experts, as well as extensive review of regulatory records.
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The short seller said Block has overstated its user growth while understating costs for acquiring customers. Moreover, it suggests that 40% to 75% of accounts could be fake.
Benzinga has contacted Block for comment on the short report.
Hindenburg Impersonates Trump, Musk To Drive Point Home: "Core to the issue is that Block has embraced one traditionally very 'underbanked' segment of the population: criminals. The company’s 'Wild West' approach to compliance made it easy for bad actors to mass-create accounts for identity fraud and other scams, then extract stolen funds quickly," the report states.
Hindenburg also targets Dorsey for publicly touting mentions of Cash App in songs as evidence of its mainstream appeal, but the firm highlights that many of these artists were talking about using the app for criminal activity.
Accounts can easily be manipulated, Hindenburg said, adding that it changed some of its account info to look like the accounts were being used by former President Donald Trump and Tesla CEO Elon Musk and had no issues transferring funds.
Hindenburg further suggests that Block has fueled much of its growth by jumping around regulatory hurdles and avoiding regulations.
The short seller said it believes Block shares should be trading between 65% and 75% lower than where the stock was trading ahead of the report's publication.
"In sum, 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," Hindenburg said.
"We also believe Jack Dorsey has built an empire—and amassed a $5 billion personal fortune—professing to care deeply about the demographics he is taking advantage of."
Indian billionaire Gautam Adani briefly became the second-richest person in the world last year, but he saw his fortunes crumble after Hindenburg Research published the results of a two-year investigation claiming Adani Group had engaged in "brazen stock manipulation and accounting fraud."
It looks like Dorsey is the next billionaire on Hindenburg's chopping block.
SQ Price Action: Block shares were down 15.7% at $61.15 at the time of writing, according to Benzinga Pro.
Photo via Shutterstock.
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