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Journalism of Courage
Bloc Inc. co-founder Jack Dorsey’s wealth took a massive hit as he lost more than $500 million on Thursday (March 23) after New York-based investor research firm and short-seller, Hindenburg Research, in its report alleged that his company overstated its user numbers and understated its customer acquisition costs through its Cash App platform.
According to the Bloomberg Billionaires Index, Dorsey’s net worth now stands at $4.4 billion after the 11 per cent drop. Meanwhile, on Thursday, Block’s shares plunged by 15 per cent, losing all the gains made so far this year, before the New York Stock Exchange closed for the day.
The company has denied all the allegations, saying that Hindenburg’s report is “factually inaccurate and misleading”. It also said it will work with the US securities regulator to explore legal action against the short seller company, Reuters reported.
The report has come just two months after Hindenburg in its investigation accused the Adani Group companies of engaging “in a brazen stock manipulation and accounting fraud scheme over the course of decades”. This caused a heavy loss of around $100 billion to the conglomerate.
The main focus of Hindenburg’s report is Block’s Cash App — a peer-to-peer (P2P) mobile payment application that allows users to quickly send, receive and invest money. According to Forbes, it was launched in 2013 in order to compete with other mobile payment apps like Venmo and PayPal.
“Cash App is a financial platform, not a bank. It provides banking services and debit cards through its bank partners.,” the news outlet said.
Hindenburg has claimed to have talked to former Block employees who estimated that 40 per cent to 70 per cent of Cash App’s accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.
It said, “Block obfuscates how many individuals are on the Cash App platform by reporting misleading ‘transacting active’ metrics filled with fake and duplicate accounts. Block can and should clarify to investors an estimate on how many unique people actually use Cash App.”
The short seller in its report also alleged that the platform has been used to facilitate criminal activities, including sex trafficking and fraud.
“Cash App was also cited ‘by far’ as the top app used in reported US sex trafficking, according to a leading non-profit organisation. Multiple Department of Justice complaints outline how Cash App has been used to facilitate sex trafficking, including sex trafficking of minors.,” the report mentioned.
It further alleged that even when the users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user. “This phenomenon of allowing blacklisted users was so common that rappers bragged about it in hip-hop songs.,” the report said.
Apart from this, the short seller’s investigation also revealed that when Block’s share price soared “on the back of its facilitation of fraud” during the pandemic, co-founders Dorsey and James McKelvey collectively sold over $1 billion of stock. Other executives including finance chief Amrita Ahuja and the lead manager for Cash App Brian Grassadonia also dumped millions of dollars in stock, the report added.
Speaking to Reuters about the investigation, Christopher Brendler, senior analyst at DA Davidson & Co., said, “What I am really concerned about is the Cash App, accusations of fraud, multiple accounts, opening accounts and fake names. And it doesn’t seem like that would be something that they would allow”.
“(There is) some evidence in the report that this is happening. So, you know, I think that’s the most damaging part of the report,” he pointed out
The Hindenburg’s report has further added to Block’s headache as its shares have continued to slump since last year due to worries about a slowdown in economic activity and consumer spending. Moreover, “Block has also taken a hit from the upheaval in the cryptocurrency industry that forms a large chunk of its revenue base,” Reuters said.
