Hindenburg Research has announced that it holds short positions in Block Inc and has accused the payments company, led by Twitter co-founder Jack Dorsey, of inflating its user numbers and understating its customer acquisition costs. In response, Block has vowed to take legal action against Hindenburg for its "factually inaccurate and misleading" report, which it claims is intended to deceive and confuse investors. Block's shares have fallen 15% to $61.67, after a previous drop of 22%.

  • Hindenburg, which has a reputation for publishing market-moving reports, has alleged that a significant portion of accounts on Block's platform are either fake, fraudulent, or associated with a single individual
  • The report has been released amid concerns over inflation, consumer spending, and the possibility of an economic downturn
  • Cash App, Block's mobile application for money transfers, is marketed as an alternative to traditional banking services

Evading Regulatory Cap and Ignoring User Concerns

Hindenburg, during its two-year investigation, interviewed former employees who claimed that the company ignored internal and user concerns, allowing criminal activity and fraud to flourish on its platform. Hindenburg's report includes screenshots of internal systems and messages from employees, and highlights financial misreporting.

  • According to Hindenburg, up to 35% of Cash App's revenue comes from interchange fees, which should be capped by law at around $892 million in revenue
  • Hindenburg alleged that Block, formerly known as Square, avoids the regulatory cap by routing revenue through a small bank, a method also used by rival PayPal, which led to an SEC investigation

Hindenburg claims that a Freedom of Information Act request indicates that Block may also be under investigation. Hindenburg also criticized Cash App's practices during the pandemic, claiming that the lockdowns posed an existential threat to Block's merchant services business.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

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