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Activist short seller accuses Cash App of facilitating fraud

The app’s owner, the fintech company Block, is the latest target of Hindenburg Research

Hindenburg Research alleges that Block allowed users to make transactions for illegal activity through Cash App. (Marco Bello/Reuters)
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Shares of Jack Dorsey-led Block tumbled Thursday after an activist short seller released a report accusing the fintech company of inflating its user numbers and facilitating fraudulent transactions.

Block, previously known as Square, is a digital payments company that offers cash register services at businesses like coffee shops and farmers-market booths. But it also offers mobile transactions through Cash App, which it owns.

Hindenburg Research, a firm that made waves for betting against Adani Group in January, alleged in a new report that Block has misrepresented to investors the number of people using Cash App and the costs of acquiring them. It also alleged that users made transactions through Cash App for illegal activity and helped facilitate fraud linked to coronavirus pandemic aid.

“Former employees described how Cash App suppressed internal concerns and ignored user pleas for help as criminal activity and fraud ran rampant on its platform,” the report alleged. It also estimated, based on interviews with former employees, that 40 percent to 70 percent of accounts are “fake, involved in fraud, or were additional accounts tied to a single individual.”

Hindenburg said it took out a short position on Block, meaning it is betting against the company’s stock price.

The report comes amid growing visibility for Cash App. In 2022, the platform had 51 million monthly active users, acquiring them at “$10 or less on average,” Block’s chief financial officer, Amrita Ahuja, said in February.

Block, which was founded by Twitter founder Dorsey, said in a statement that it planned to “explore legal action” against Hindenburg and called the report “factually inaccurate and misleading.” The company pointed out that it is a publicly traded company with regulatory requirements and public disclosures, “and are confident in our products, reporting, compliance programs, and controls.”

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price,” the company’s statement added. “We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.”

Hindenburg did not immediately respond to a request for comment.

Block closed down 14.8 percent, at $61.89 a share, on Thursday, rebounding slightly from a 19 percent drop right after the report’s release.

Block began as the payments company Square, which became known for its distinct white touch-screen registers and card readers. But as the pandemic shut down in-person businesses, Cash App boomed as many users deposited their federal stimulus checks into the app’s digital wallets, as the Wall Street Journal reported.

Yet with Cash App’s popularity came reports of scams, which also plagued rival payment apps like Zelle and Venmo.

What was particularly egregious, according to the Hindenburg report, is that Cash App ignored concerns from employees and regulators about the “rampant” fraud on the platform in “an apparent effort to preserve its growth engine.”

Hindenburg was founded by Nate Anderson, an activist short seller who has quickly risen to prominence in the past several years. Activist short sellers are controversial: Some see them as unsavory actors because their success hinges on a company’s failure. But others say they are important actors driven by high financial rewards to expose corporate fraud.

In January, Hindenburg took a short position on Adani Group, an Indian conglomerate owned by one of Asia’s richest men. At that time, Hindenburg released a report accusing Adani of artificially boosting its share price using a network of overseas shell companies. Adani denied the allegations, but its shares tanked on the release, and months later the company remains embattled.

Hindenburg also made waves in 2020, when shares in the electric vehicle maker Nikola cratered after it was accused of misrepresenting its technology. Hindenburg took a short position on Nikola, and investigations from the Justice Department and securities regulators followed. Nikola’s founder was later convicted on fraud charges.

Brett Horn, a Morningstar equity analyst, said that much of Hindenburg’s Block report seemed to rely on anecdotal evidence, adding that fraud is an issue on every payment app. But he said the report pointed to a broader issue — that payment apps can sometimes act as “quasi bank accounts” and are operating in an unclear regulatory landscape.

He said it could be an issue for Block if regulators take Hindenburg’s report seriously. There’s also potential for a major sell-off of Block shares, though Horn said the company’s stock price is normally “highly volatile.”

“We’ve clearly seen a market response today,” he said.