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Hindenburg takes aim at Dorsey’s payments firm Block, shares plunge

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Synopsis The US short seller, behind a market rout of over $100 billion in India’s Adani Group, said in its report that former Block employees estimated that 40% to 75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual. Agencies Jack Dorsey, founder, Twitter Hindenburg Research on Thursday disclosed short positions in Block Inc and alleged that the payments firm led by Twitter co-founder Jack Dorsey overstated its user numbers and understated its customer acquisition costs. The US short seller, behind a market rout of over $100 billion in India’s Adani Group , said in its report that former Block employees estimated that 40% to 75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.

Block shares fell as much as 22% before paring losses and were last down 14% at $62. 61 in afternoon trading. The company said the short seller’s report on its Cash App business was “factually inaccurate and misleading report” and it intended to work with the US Securities and Exchange Commission to explore legal action.

After reviewing the full report, Block said it was “designed to deceive and confuse investors”. The move is seen as a challenge to Dorsey, who co-founded Block in 2009 in his San Francisco apartment with the goal to shake up the credit card industry, and is the company’s largest shareholder with a stake of around 8%. Discover the stories of your interest Blockchain 5 Stories Cyber-safety 7 Stories Fintech 9 Stories E-comm 9 Stories ML 8 Stories Edtech 6 Stories The NYU dropout was just until two years ago splitting his time between the payments firm and Twitter, his other venture that went private in 2022 in a $44 billion buyout by Elon Musk that Dorsey supported.

“Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping,” Hindenburg said in a note published on its website. The report comes at a time when the outlook for the payments industry has been clouded by worries over the strength of consumer spending in the face stubbornly high inflation and expectations of an economic downturn. Those concerns triggered a more than 60% slump in Block’s shares last year.

Hindenburg said that Block “obfuscates” how many individuals are on the Cash App platform by reporting misleading “transacting active” metrics filled with fake and duplicate accounts. Reuters could not verify the claims raised in the report. Cash App allows users to transfer money through a mobile application and is touted by the company as an alternative to traditional banking services.

The app had 51 million monthly transacting actives, a 16% year-over-year increase during December 2022, Block said in fourth-quarter earnings letter. The short seller added that co-founders Jack Dorsey and James McKelvey collectively sold over $1 billion of stock during the pandemic as the company’s share price soared. Other executives including finance chief Amrita Ahuja and the lead manager for Cash App Brian Grassadonia also dumped millions of dollars in stock, the report added.

“What I am really concerned about is the Cash App, accusations of fraud, multiple accounts, opening accounts and fake names. And it doesn’t seem like that would be something that they would allow,” said Christopher Brendler, senior analyst at D. A.

Davidson & Co. “(There is) some evidence in the report that this is happening. So, you know, I think that’s the most damaging part of the report,” he added.

Based on the session’s 20% price move (as of 9:55 a. m. ET), short sellers have made over $400 million in paper profit, according to data from financial analytics firm Ortex.

Short interest was 27. 96 million shares, or 5. 21% of free float.

The company’s ticker was the top trending on retail investor-focused forum StockTwits . Block has also taken a hit from the upheaval in the cryptocurrency industry that forms a large chunk of its revenue base. The company offers point of sales systems and an app that allows people to trade cryptocurrency.

Last month, Block said it was “meaningfully slowing” the pace of hiring this year to control costs. Founded in 2017 by Nathan Anderson, Hindenburg is a forensic financial research firm that analyses equity, credit and derivatives. Hindenburg invests its own capital and takes short-positions against companies.

After finding potential wrongdoings, the company usually publishes a report explaining the case and bets against the target company, hoping to make a profit. Short sellers typically sell borrowed securities and aim to buy these back at a lower price. Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp.

click here! Thursday, 23 Mar, 2023 Experience Your Economic Times Newspaper, The Digital Way! Read Complete Print Edition » Front Page Pure Politics Companies ET Markets More Fed Hikes Rates by 25bps, Signals One More on Cards The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two US banks. FM Calls State-owned Lenders’ Meet Amid Global Banking Crisis Finance minister Nirmala Sitharaman has called a special meeting of state-run lenders later this week to seek their views on heightened global concerns over the banking system’s vulnerability due to monetary tightening. With Great Ecommerce Comes Great Responsibility for Online Platforms The consumer affairs ministry is working on tightening ecommerce rules to make online retail platforms liable for fraud committed by sellers and attaching “fallback liability” to their role as intermediaries, said a senior official.

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From: economictimes_indiatimes
URL: https://economictimes.indiatimes.com/tech/technology/hindenburg-takes-aim-at-dorseys-payments-firm-block-shares-plunge/articleshow/98951064.cms

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