Shares in dual-listed Block (ASX:SQ2) fell more than 18% on the ASX on Friday after a US short seller, Hindenburg Research, published a lengthy report accusing the parent company of local fintech Afterpay of inflating its user metrics and fraud facilitation after it used Block’s Cash App to order a cash card under the name Donald Trump.
Block closed at $88.94 on Friday, down 18.4%. The company is also listed on the New York Stock Exchange, with its shares fell by 22% before the market closed and remain down around 15% at US$61.88 in after hours trade.
In response the company said it will “explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business”.
The New York short seller says it spent two years compiling its dossier against the company, which it titled: “Block: How Inflated User Metrics and ‘Frictionless’ Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion.”
Block responded that Hindenburg is known for these types of attacks, designed so short sellers can profit from a declined stock price.
“We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors,” Block’s statement said
“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls.”
Block was originally cofounded by Twitter cofounder and former CEO Jack Dorsey. The company acquired Australian buy now pay later fintech Afterpay for A$39 billion.
The Hindenburg report takes aim at Afterpay as a bad deal for Block, while also accusing its business model of being built around legislative loopholes amid rising losses.
Afterpay’s results, released after the merger in April last year, saw its loss jump for the six months to end 2021, to be $345.5 million in the red. The company’s bad debts are also growing, which Hindeburg points out.
“Afterpay was designed in a way that avoided responsible lending rules in its native Australia, extending a form of credit to users without income verification or credit checks,” the report said.
“The service doesn’t technically charge ‘interest’, but late fees can reach APR equivalents as high as 289%.”
But most of the criticism is based around Block’s Cash App with the short seller point to scam accounts and fake users.
“We ordered a Cash Card under our obviously fake Donald Trump account, checking to see if Cash App’s compliance would take issue — the card promptly arrived in the mail,” the report said, arguing that its proof that the user metrics are exaggerated.
“Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user,” it said.
It also used data provided by the state of Massachusetts, where 69,000 unemployment payments were reclaimed from the bank behind Cash App accounts, well in excess of the industry average
“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,” the report said.
“Multiple key lapses in Cash App’s compliance processes facilitated billions in government payment fraud.”
Hindenburg also took aim at the ethics behind Block’s products.
“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.
How it plays out for both side remains to be seen, but Block will no doubt take hard from WiseTech Global’s skirmish with China-based short seller J Capital, which published a series of critical reports in late 2019 and early 2020.
WiseTech (ASX: WTC) shares sat just under A$39 and billions were wiped from the company’s market cap in the wake of the reports. WiseTech shares closed today at $63.42 and the company is now Australia’s most valuable tech stock.