Hindenburg Vs Block: Dorsey-Backed Firm Pushes Back On Short Seller's Claims

About a week after a report from short selling firm Hindenburg Research cratered its stock price, Block Inc. has responded to some of the allegations—especially pushing back on elements such as fake users and fraudulent activity.

On March 23, Hindenburg Research put out a report and revealed that the firm had taken a short position against Jack Dorsey's Block. The report alleged that Block significantly overstates its active user base and also has compliance gaps that have allowed bad actors to mass-create accounts for identity fraud and other scams.

Block's stock fell into the red after the Hindenburg report was released and dropped over 16% on March 23.

As a firm, Block has two main offerings: Square—which makes point-of-sale devices—and Cash App, a mobile payment service provider. Hindenburg's report largely focused on Cash App's business and stated that there were mass instances of user-identity fraud and criminal activity being conducted using the application.

While Block has threatened to sue Hindenburg for its claims and the impact they had on the firm's stock price. A lawsuit is yet to fructify but Block has responded to some of Hindenburg's key allegations surrounding fake users, fraudulent activity and compliance measures at the firm.

"Thematically most of the questions we've received have to do with how we measure Cash App transacting actives and our compliance program," Block said in a statement, referring to questions the firm has received from its investors after Hindenburg's report was released.

The 44 million verified accounts represented approximately 39 million unique Social Security numbers as of December 2022, Block noted in its statement. Social Security numbers are unique nine-digit numbers issued to US citizens, permanent residents and temporary residents.

In its report, Hindenburg had alleged that Block's former employees had estimated that between 40% and 75% of its accounts were fake, involved in fraud or were additional accounts tied to a single individual.

"We estimate that the 44 million verified accounts constituted approximately 97% of Cash App inflows in December 2022," the firm noted in its statement.

Responding to questions about fraud on Cash App—which Hindenburg alleged was rampant—Block stated that in 2022, approximately 2.4% of Cash App transacting active accounts were "denylisted" by its compliance and risk teams. Denylist-ing is a control that prevents users from sending and receiving funds, using a Cash App Card, buying stocks or bitcoin, or taking a loan.

"Since 2019, the company’s compliance investments have grown more than twice as fast as overall gross profit, and compliance investments have also meaningfully increased as a percentage of our overall operating expenses," Block said of its compliance efforts without stating the exact dollar figures it spent on compliance operations.

While Hindenburg Research's report also questioned Block's reliance on a small bank to be able to earn higher amounts of interchange fee and the business rationale behind the firm's acquisition of Afterpay—a buy-now-pay-later service—Block's statement did not address those questions.

"The company seems to be betting that the consequences will either be a 'cost of doing business' or at the very least, come later," Hindenburg stated in its report. "Either way, we expect the luster will wear off and investors will realize that Block is really a money-losing, undifferentiated loan & fee originator. Like many of its peers in fintech and banking, it will eventually trade closer to its net tangible book ," it added.

Block's shares recovered somewhat after it issued its responses to the questions raised by Hindenburg. The company's stock ended up by 3.01% on Thursday, with shares changing hands for $68.49 a piece.