After accusing the Adani Group of stock manipulation and accounting fraud scheme, which resulted in the stock prices of various firms of the group tumbling, Hindenburg Research has taken a short position in shares of Block, Inc, payment and mobile banking services firm, founded by former Twitter CEO Jack Dorsey.
Hindenburg claimed that its two-year long investigation has concluded that Block has "systematically taken advantage of the demographics it claims to be helping."
"The “magic” behind Block’s business has not been disruptive innovation, but rather the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics," it said in a report.
Hindenburg said its research, involving several interviews with former employees, partners, and industry experts, extensive review of regulatory and litigation records, revealed that Block has "wildly overstated its genuine user counts and has understated its customer acquisition costs."
Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user, Hindenburg said in its report.
"Dorsey has publicly touted how Cash App is mentioned in hundreds of hip hop songs as evidence of its mainstream appeal. A review of those songs show that the artists are not generally rapping about Cash App’s smooth user interface—many describe using it to scam, traffic drugs or even pay for murder."
Beyond facilitating payments for criminal activity, the platform has been overrun with scam accounts and fake users, according to numerous interviews with former employees, it said.
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, the report observed.
The short seller accused Block of fuelling its profitability by avoiding a key banking regulation meant to protect merchants.
"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."
"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," it said.
Shares of Block slid 20 per cent to $57.85 in premarket trading following the report, according to Reuters.