Block Inc. (SQ) shares plunged lower Thursday after Hindenburg Research, a noted short-seller, accused the payment group lead by former Twitter CEO Jack Dorsey of over-stating its user base and helping facilitate illegal transactions.
In a research note published Thursday, Hindenburg said a two-year investigation into Block, which was formerly known as Square and focuses on 'frictionless' technology aimed at empowering an 'underbanked' customer base, has "systematically taken advantage of the demographics it claims to be helping".
Hindenburg said its research was based on employee interviews, 'Freedom of Information' requests for public records and conversations with industry experts. It also indicated it had taken a short position in Block stock.
Block was not immediately available to comment on the Hindenburg allegations when contacted outside of regular business hours by TheStreet.
"The “magic” behind Block’s business has not been disruptive innovation, but rather the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics," Hindenburg said, including a 51 million monthly active user base.
"Our research indicates, however, that Block has wildly overstated its genuine user counts and has understated its customer acquisition costs. Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.
Block shares were marked 16.2% lower in Thursday afternoon trading to change hands at $61.04 each, a move that would dump the stock into negative territory for the year.
"We intend to work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today," Block said in a statement emailed to TheStreet. "Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price."
"We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors," Block added. "We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics."
Cathie Wood's ARK Innovation ETF (ARKK), where Block is its fifth-largest holding, was marked 1.9% lower at $37.66 each.
Block cautioned investors in February that it would "meaningfully" slow hiring over the coming year, but held to its 2023 financial targets, amid what it called "uncertainty" in the global payments market.
The group reported overall revenues of $4.65 billion over the three months ending in December, just ahead of Street forecasts, but posted an adjusted bottom line of 22 cents per share, around 8 cents shy of consensus estimates.
Earlier this year, Hindenburg Research published a report on the Adani Group, an Indian company controlled by billionaire Gautam Adani, that described the conglomerate as "nothing but a lie".
Hindenburg accused Adani of engaging in a "brazen stock manipulation and accounting fraud scheme over the course of decades", and accused it of improperly using tax havens to bury stock holdings in some of its listed firms while noting that "substantial debt" could threaten the broader group.
In a 413-page reply, published on January 29, Adani said "all transactions entered into by us with entities who qualify as 'related parties' under Indian laws and accounting standards have been duly disclosed by us", adding the Hindenburg's claims regarding offshore entities were "misleading".
