Block Inc. (SQ) shares fell on Thursday, after the release of a report by short seller Hindenburg Research. The Cash App service that was earlier called Square fell by 13 percent on early trading, and continued to fall through the day. The short seller questioned the user numbers presented by the company. It also accused Block of predatory tactics, according to its investigative report about the company that was conducted over two years.
Hindenburg Research stated that Block reported misleading metrics that were “filled with fake and duplicate accounts” that resulted in an obfuscation of the true number of users of its Cash App. The short seller also claimed that it charged “predatory loans and fees” to lower-income people and minorities which is the demography that the Block has said that it would serve.
Jack Dorsey, the CEO and co-founder of Block had spoken of making Cash App its customers primary banking tool. Last November, in a Wall Street Analysts’ call, Dorsey, who was also the founder of Twitter that was bought over by Elon Musk last year, said “Everything that you need in your financial life, you can find within Cash App.”
However, the Hindenburg Research report claimed that there were many shortcomings in Cash App including compliance controls. It said that the App was used to pay for activities such as sex trafficking and to move drug money, citing court documents that were presented by law enforcement agencies.
The report by Hindenburg Research also focused on Cash App’s business practices. It noted that the Consumer Financial Protection Bureau (CFPB) and some state attorneys general had opened investigations into Block’s business practices. The company said that its filings had disclosed these investigations. Block also reportedly described the investigative requests by the CFPB as “overly burdensome,” according to court documents.
Block released a statement saying that the report from the short seller was “factually inaccurate and misleading.” It also said that it had started exploring legal action against Hindenburg Research.
Nathan Anderson’s Hindenburg Research had targeted other companies in the past including electric truck maker Nikola Corp. and others. The electric truck maker’s founder Trevor Milton was convicted of securities fraud.
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