Shares of Jack Dorsey’s Block Fall on Short-Seller Report

Hindenburg’s report is “factually inaccurate and misleading” and “designed to deceive and confuse investors,” Block said in a statement. The company also said it was exploring legal action against the short seller.

Short sellers profit when a stock falls. They do this by borrowing stocks that they believe are overvalued, selling them, and buying them back later at a lower price. 

Block’s shares were down as much as 22% Thursday morning before recovering slightly to close at $61.88. It was the largest one-day percentage drop in Block’s stock since May 2022, wiping out about $6.5 billion in market value and erasing gains it notched for the year through Wednesday. Block’s shares are down about 78% from their August 2021 heights.

Block is best known for its signature white credit-card readers that let businesses accept payments with a smartphone or tablet, though its Cash App peer-to-peer payment service has been a key driver of the company’s growth in recent years. The ease with which Block made it possible for people to accept stimulus checks and unemployment benefits in Cash App during the Covid-19 pandemic helped turbocharge its usage.

Cash App had more than 51 million monthly active users as of December, more than double its prepandemic user count. Inflows surpassed $203 billion in 2022, about four times what it brought in during 2019. In the fourth quarter, gross profit at Cash App exceeded that of Block’s small-business-focused Square unit. 

Jack Dorsey, Block’s CEO and co-founder, has set a goal of making Cash App the primary banking tool of its customers. Through Cash App, users can send money to one another via smartphone, purchase things with a prepaid debit card, file their taxes, receive their paychecks and invest in bitcoin and slices of individual stocks. “Everything that you need in your financial life, you can find within Cash App,” Mr. Dorsey said on a call with Wall Street analysts in November.

Hindenburg said much of Cash App’s pandemic-induced growth came from facilitating suspect payments. Public records Hindenburg requested from states including Massachusetts and Ohio showed that a bank that partners with Cash App had a disproportionate number of suspect payments for unemployment benefits. Former Cash App employees that Hindenburg interviewed estimated that a large portion of Cash App accounts were potentially fake, raised red flags for fraud or were connected to a single real person. 

Cash App’s compliance controls were another target for Hindenburg. The short seller cited court documents in which law-enforcement agencies said criminals used Cash App to move drug money or pay for sex trafficking. A Baltimore gang even named itself Cash App, Hindenburg said. Members of the gang pleaded guilty to drug charges.

One of Cash App’s main sources of revenue is a 0.5% to 1.75% fee it charges users who want to transfer funds out of their accounts instantly instead of waiting up to three days for a bank transfer. Hindenburg said this “instant deposit” feature was a way for scammers to move money quickly and expensive for Cash App’s legitimate users, arguing that it amounted to an annual percentage rate of over 205% at the midpoint of its fee range. 

“Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit,” Hindenburg said in its report. 

Hindenburg called attention to investigations from the Consumer Financial Protection Bureau and many state attorneys general into Cash App’s business practices, including its handling of customer complaints and disputes. Block disclosed those matters in securities filings and said the CFPB’s investigative requests were “overly burdensome” in court documents.

Nathan Anderson’s

Hindenburg has previously targeted companies including

Nikola Corp.

, the electric truck maker whose founder was later convicted of securities fraud, and Indian conglomerate

Adani Group.

512599 -1.19%

Nikola has said Hindenburg’s report contained misleading information. Adani has called Hindenburg’s claims baseless, countering the short seller’s report with a 413-page rebuttal. 

Write to Peter Rudegeair at [email protected]

Hindenburg’s report is “factually inaccurate and misleading” and “designed to deceive and confuse investors,” Block said in a statement. The company also said it was exploring legal action against the short seller.

Short sellers profit when a stock falls. They do this by borrowing stocks that they believe are overvalued, selling them, and buying them back later at a lower price. 

Block’s shares were down as much as 22% Thursday morning before recovering slightly to close at $61.88. It was the largest one-day percentage drop in Block’s stock since May 2022, wiping out about $6.5 billion in market value and erasing gains it notched for the year through Wednesday. Block’s shares are down about 78% from their August 2021 heights.

Block is best known for its signature white credit-card readers that let businesses accept payments with a smartphone or tablet, though its Cash App peer-to-peer payment service has been a key driver of the company’s growth in recent years. The ease with which Block made it possible for people to accept stimulus checks and unemployment benefits in Cash App during the Covid-19 pandemic helped turbocharge its usage.

Cash App had more than 51 million monthly active users as of December, more than double its prepandemic user count. Inflows surpassed $203 billion in 2022, about four times what it brought in during 2019. In the fourth quarter, gross profit at Cash App exceeded that of Block’s small-business-focused Square unit. 

Jack Dorsey, Block’s CEO and co-founder, has set a goal of making Cash App the primary banking tool of its customers. Through Cash App, users can send money to one another via smartphone, purchase things with a prepaid debit card, file their taxes, receive their paychecks and invest in bitcoin and slices of individual stocks. “Everything that you need in your financial life, you can find within Cash App,” Mr. Dorsey said on a call with Wall Street analysts in November.

Hindenburg said much of Cash App’s pandemic-induced growth came from facilitating suspect payments. Public records Hindenburg requested from states including Massachusetts and Ohio showed that a bank that partners with Cash App had a disproportionate number of suspect payments for unemployment benefits. Former Cash App employees that Hindenburg interviewed estimated that a large portion of Cash App accounts were potentially fake, raised red flags for fraud or were connected to a single real person. 

Cash App’s compliance controls were another target for Hindenburg. The short seller cited court documents in which law-enforcement agencies said criminals used Cash App to move drug money or pay for sex trafficking. A Baltimore gang even named itself Cash App, Hindenburg said. Members of the gang pleaded guilty to drug charges.

One of Cash App’s main sources of revenue is a 0.5% to 1.75% fee it charges users who want to transfer funds out of their accounts instantly instead of waiting up to three days for a bank transfer. Hindenburg said this “instant deposit” feature was a way for scammers to move money quickly and expensive for Cash App’s legitimate users, arguing that it amounted to an annual percentage rate of over 205% at the midpoint of its fee range. 

“Block has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit,” Hindenburg said in its report. 

Hindenburg called attention to investigations from the Consumer Financial Protection Bureau and many state attorneys general into Cash App’s business practices, including its handling of customer complaints and disputes. Block disclosed those matters in securities filings and said the CFPB’s investigative requests were “overly burdensome” in court documents.

Nathan Anderson’s

Hindenburg has previously targeted companies including

Nikola Corp.

, the electric truck maker whose founder was later convicted of securities fraud, and Indian conglomerate

Adani Group.

512599 -1.19%

Nikola has said Hindenburg’s report contained misleading information. Adani has called Hindenburg’s claims baseless, countering the short seller’s report with a 413-page rebuttal. 

Write to Peter Rudegeair at [email protected]