Block said it is working with the SEC on how to “explore legal action against Hindenburg Research for the factually inaccurate and misleading report”.
American multinational financial technology giant Block Inc (NYSE: SQ) is currently under intense pressure following a damning report from short seller, Hindenburg Research. According to the report, Hindenburg Research accused Block of running a fraudulent operation that takes advantage of the demographics it claims to serve, the unbanked.
Known for such reports, Hindenburg said its investigation into Block Inc was conducted over the span of two years and it featured interviews with both current and former employees. The report noted that Block is in the habit of inflating its user metrics, a core indication of growth and it profits from doing so.
“Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping. 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,” the report reads.
Hindenburg also alleges that Block maintains weak compliance with respect to its Know-Your-Customer (KYC) provisions. In a bid to prove this, the research firm said it opened a phony account on Cash App in the name of former President Donald Trump and Tesla CEO Elon Musk.
The firm said the accounts were not just opened, but associated payment cards were requested and that belonging to the fake Donald Trump account was delivered via mail. Per the report,
“Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.”
Following the damning discoveries, Hindenburg Research said it has taken a short position on Block’s shares. Since the report broke, the company’s stock has been on a downward spiral, closing down 14.82% to $61.88 at the close of trading on Thursday.
Block Inc’s Response to the Hindenburg Research
The revelations made by Hindenburg Research have received a very strong rebuttal from the company noting that it is a heavily regulated company that takes its compliance obligations so seriously.
“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,” Block added.
The company said it is working with the United States Securities and Exchange Commission (SEC) on how to “explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today,” the company said in a press release.
While the actions and approach of Hindenburg Research may be hurtful to investors, it has a high tendency of drawing an intense investigation from the regulator in the near future.
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