American payment firm Block Inc has lost nearly 20 per cent in market capitalisation following a scathing report by US short-seller Hindenburg Research. The report accuses Block and its co-founder and CEO Jack Dorsey of fraud against consumers and the government, misleading investors with inflated metrics, and systematically taking advantage of the demographics it claims to be helping.
Block, formerly known as Square, is a company with a $44 billion market capitalisation, and the short seller claims that the payment firm's claims to have developed a 'frictionless' and 'magical' financial technology with a mission to empower the 'unbanked' and the 'underbanked' are misleading.
The report alleges that the 'magic' behind the company's business had not been disruptive innovation, but rather its "willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as a revolutionary technology, and mislead investors with inflated metrics". It also claims that Block's Cash App platform had wildly overstated its genuine user counts and had understated its customer acquisition costs.
Former employees were quoted in the report, saying that 40 per cent-75 per cent of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual. The report claims that Cash App suppressed internal concerns and ignored user pleas for help as criminal activity and fraud ran rampant on its platform.
The report accuses Dorsey of making money by dumping stocks of the company when they surged during the pandemic time. It said Block reported a surge in user counts and revenue, ignoring the contribution of widespread fraudulent accounts and payments. The new business provided a sharp one-time increase to Block's stock, which rose 639 per cent in 18 months during the pandemic.
"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. Other executives, including CFO Amrita Ahuja and the lead manager for Cash App Brian Grassadonia, also dumped millions of dollars in stock," the report said.