Short Seller Accuses Jack Dorsey’s Block of Facilitating Fraud

Hindenburg Research, the small investment firm whose critical investigative reports pummeled shares in an Indian industrial conglomerate and an electric-vehicle start-up, has found its newest target: Jack Dorsey’s financial technology company, Block.

Hindenburg published a 17,600-word report on Thursday accusing Block of overstating its user base and failing to stamp out fraud and illegal activity on its platforms — particularly Cash App, its mobile payment service.

“We think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst practices in order to fuel growth and profit from facilitation of fraud against consumers and the government,” Hindenburg wrote in its report.

Shares in Block fell closed 15 percent lower on Thursday, recovering somewhat after plunging nearly 20 percent in morning trading. Block responded to the accusations by saying it intended to “explore legal action against Hindenburg Research.”

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price,” Block said in a statement. “We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.”

Block has become the latest prominent object of criticism by Hindenburg, whose business revolves around publishing research reports that harshly evaluate companies — and then, often, betting that their shares will fall, a practice known as short selling.

A Hindenburg report erased billions of dollars in market value from the Adani Group, the industrial conglomerate founded by the Indian billionaire Gautam Adani. Hindenburg’s allegations of fraud at the electric-truck maker Nikola eventually led to the ouster — and criminal prosecution — of Trevor Milton, the company’s chief executive.

Block, which was known as Square until late 2021, was founded by Mr. Dorsey and Jim McKelvey in 2009. Begun as a platform for merchants to take card payments, it eventually added Cash App and, through takeovers, the buy-now-pay-later platform Afterpay and the streaming music service Tidal.

In its report, Hindenburg wrote that Block’s Cash App platform was rife with fake accounts that artificially bolstered its user counts. Of more concern is what the short seller said was prolific criminal activity on Cash App, including payments for illegal drug sales and sex trafficking. (Unusually, Hindenburg cited as evidence several rap lyrics describing the use of Cash App to pay for drugs or assassination attempts.)

The investment firm also cited statistics from state governments including Massachusetts and Ohio suggesting that Cash App was used for fraudulent pandemic relief applications at a higher rate than other banking services. The report also accused Block executives of ignoring warnings by employees and regulators about signs of potential pandemic relief fraud.

And the rise in Block’s shares during the pandemic, which the company attributed to the explosion of online shopping — but which Hindenburg said was based in part on fraud perpetrated on its platforms — prompted executives like Mr. Dorsey to sell millions of dollars’ worth of stock.