Hindenburg on Thursday accused Twitter founder Jack Dorsey's company Block of "frictionless" fraud that inflated user metrics, and enabled insiders to cash out over $1bn.
In a two year investigation, the US-based shortseller found that 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.
Hindenburg said it has taken short positions in shares of Block Inc. whose shares sunk 20 percent after the report came out. According to Bloomberg, Dorsey’s fortune slumped $526 million on Thursday, biggest single-day fall since May. Following the 11 percent drop, Dorsey is now worth $4.4 billion.
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The research involved interviews with dozens of former employees, partners, and industry experts, along with a review of regulatory and litigation records, and FOIA and public records requests.
Block's Cash App platform has been in the news lately due to its post-pandemic surge, with expectations that its 51 million monthly transacting active users and low customer acquisition costs will drive high margin growth and serve as a future platform to offer new products.
However, the research conducted by the team indicates that Block has wildly overstated its genuine user counts and has understated its customer acquisition costs. The investigation revealed that 40 percent-75 percent of accounts reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.
The most disturbing finding of the investigation is that Block has embraced one traditionally "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 quickly extract stolen funds.
Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user.
First Published: Mar 23, 2023 6:27 PM IST
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