The Hindenburg Research Strikes Again, Targets Jack Dorsey’s Block Alledging $1 Billion Fraud; Bad days For Crypto’s To Continue?

It looks like Hindenburg Research is at it again. This time, they’re targeting Jack Dorsey-run Block, a $44 billion market cap company that provides cryptocurrency trading services.

The short-seller, which has made a name for itself by targeting high-profile companies and individuals with its research reports, has now set its sights on Jack Dorsey’s mobile payment company Block. In a new report released, the firm alleges that Block has been “facilitating a fraud against customers and the authorities” to the tune of $1 billion.

Entrepreneur Jack Dorsey founded Block Inc, which offers payment and mobile banking services for merchants and consumers. The company, formed in 2009, called Square then, came up with an innovative idea, and it used a tiny card reader that could plug into a smartphone’s headphone jack, enabling artists and vendors to take credit card payments easily.

Renamed Block, the company expanded its scope to peer-to-peer payments and bank-like products with Cash App. It also acquired Afterpay and Jay-Z’s Tidal music streaming service. The company also operates an FDIC-insured bank, offering stock and cryptocurrency trading.

Square’s corporate renaming to Block was partly meant to reflect that widening aperture and broader plans around crypto and blockchain.

According to the damning report, Block “obfuscates” customer numbers by misleading “transacting active” metrics with fake accounts and inflating its user base by up to 900%. The report also alleges that this Fraud could amount to over $1 billion in losses for investors.

The Bomb!

The report claims that Block was aware of fraudulent activity taking place on its platform but failed to take action or alert authorities. It also accuses the company of using customer funds for personal gain and failing to adequately disclose financial information in order to mislead investors about its actual financial position.

Now, Hindenburg Research is no stranger to controversy when it comes to its research reports. Just a month ago, it created a furore in global and Indian markets when it put allegations against Gautam Adani, so much so that it became a burning issue in the Indian parliament with opposition parties holding dharnas and even creating a ruckus in the parliament. 

Their previous allegations against Gautam Adani led to a $150 billion reduction in his net worth, so this latest accusation against Block could have severe implications if proven true.

What Does The Hindenburg Alledge This Time?

On Thursday, Hindenburg declared that Block had gone on to misrepresent its user count and also underestimated its customer acquisition expenses. 

Block had media reports citing its claims to have “magical” and “frictionless” financial technology to assist the “unbanked” and “underbanked” and has a nearly $44 billion market cap.

The Hindenburg report claims that Block has overstated the actual number of users by leaps and bounds and, at the same time, has understated the cost of acquisitions of new customers. 

It further claims to have arrived at this conclusion after conducting a two-year investigation wherein it found that Block has, in fact, been taking advantage of the people it asserts it is helping. 

What’s more, the report also alleges that while Jack Dorsey has iterated that he deeply cares about the demographics in reality, he has gone on to build a massive empire and made himself a fortune of almost $ 5 billion at the cost of these demographics he says he is helping. 

After the pandemic, most analysts were gung ho about the growth prospects of Block’s Cash App since they opined that the platform’s almost 51 million monthly transacting active users and seemingly low customer acquisitions costs would result in high margin growth and also lead to Block offer new products in the future. 

Coming back to the Hindenburg report, it also touched upon the former employees who believed that nearly 40-75 per cent of the accounts looked to be fake and engaged in Fraud or were different accounts for the same person.

Hindenburg asserted that Block co-founders Dorsey and James McKelvey sold more than $1 billion worth of stock when the company’s share price increased during the pandemic.

The report also makes a mention of other executives, like Amrita Ahuja, who was in charge of finance, and Brian Grassadonia, who handled Cash App, who also sold millions of dollars worth of stock.

The Effect 

As of Thursday morning, the tweet from Wednesday had more than 31,000 likes and 6 million views.

Shortly after the opening bell, shares of Block fell around 20 per cent.

Surprised?

The allegations come as no surprise, given the recent scrutiny of crypto companies and their practices. In fact, just last month, the SEC charged Ripple Labs Inc., another major player in the crypto space, with conducting unregistered security offering worth more than $1 billion.

Ripple Labs, a blockchain developer and creator of the XRP token, the outcome of the U.S. regulator’s court case against Ripple will have far-reaching consequences for the cryptocurrency industry.

Blocks Response

Block has since responded to these claims saying that they are false and misleading and has asked for a retraction from Hindenburg Research. They also stated that their metrics are accurate and transparently reported on their website every quarter. 

• Block said in a statement issued about five hours after the Hindenburg declared it took a short position in Block with a host of claims alleging that the CashApp parent sought to defraud investors, saying that it was “factually inaccurate and misleading”.

• Block said it planned to “explore legal action” against Hindenburg, who sought to “deceive and confuse” Block investors to “profit from a declined stock price.”

• However, the response did little to soothe investors, as shares of Block slipped further 2% following its release to $61.88, down a whopping 15% in Thursday trading.

Conclusion: Although Block has responded to these allegations, but it is likely that they may face mounting pressure from both regulators and investors alike over these allegations of Fraud and mismanagement. 

However, many investors remain sceptical about Blocks’ denial due to past issues with other crypto companies, such as Bitfinex, which was accused of hiding losses of nearly $850 million earlier this year.

At this point, it remains unclear whether or not there is any truth behind these allegations, but one thing is sure. If proven true, then it would be yet another blow for both Jack Dorsey’s reputation as well as investor confidence in cryptocurrencies overall.

This story will undoubtedly be one worth watching as more details emerge in the coming days and weeks ahead!