This week, Hindenburg Research has got former Twitter CEO Jack Dorsey's Block (formerly Square) in its sights, as the forensic financial research firm released its new report titled “Block—How Inflated User Metrics and “Frictionless” Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion.”
But before we delve further, what is Hindenburg Research?
Hindenburg Research: Who are They & What do They do?
Founded in 2017 by Nathan Anderson, Hindenburg Research is a financial research firm that conducts investigations and publishes reports on publicly traded companies. The firm gained widespread attention for its critical reports on various companies, such as the electric vehicle company Nikola Corporation.
The company engages in the analysis of equity, credit, and derivatives markets and utilizes its own capital to invest and take short positions against companies. Short selling involves selling borrowed securities and intending to repurchase them at a lower price.
Upon identifying potential misconduct, the firm often releases a report outlining the case details and proceeds to bet against the target company to generate a profit.
Hindenburg Research uses a combination of traditional investigative journalism techniques, data analysis, and expert interviews to uncover potential fraudulent or misleading practices by companies.
The firm's reports typically provide detailed analysis and evidence to support its claims, and its findings have been cited by mainstream media outlets such as The New York Times and Bloomberg.
However, Hindenburg Research has also faced criticism for its short-selling activities, as the firm profits from the decline in stock prices that often follows the publication of its reports. Some have accused the firm of being biased against the companies it investigates and potentially spreading false or misleading information to manipulate stock prices.
Hindenburg Research is named after the German airship LZ 129 Hindenburg, which famously caught fire and crashed in New Jersey in 1937. The Hindenburg disaster was a major event in aviation history and is widely remembered for its tragic loss of life and the dramatic images of the burning airship.
The name “Hindenburg” symbolizes the firm's mission to expose and bring down companies it believes are engaging in fraudulent or deceptive practices. Similar to the Hindenburg disaster, which revealed the dangers of air travel at the time, Hindenburg Research's reports aim to reveal the risks and dangers of investing in certain companies.
It's also worth noting that “Hindenburg” has become somewhat iconic in popular culture and is often associated with disaster or failure. By using this name, the firm aims to draw attention to the potential risks and pitfalls of investing in certain companies.
Hindenburg Shorts Jack Dorsey's Payment Company Block
Hindenburg Research disclosed on Thursday that it had taken a short position against the payments company Block Inc (SQ.N) and claimed that the company had overstated its user numbers and understated customer acquisition costs. The allegations also include that a good chunk of Block's accounts reviewed were fake, fraudulent, or additional accounts tied to a single individual.
According to Hindenburg, Block's compliance systems were likened to a “Wild West” approach.
After conducting a two-year investigation, Hindenburg's note on its website stated that Block had systematically exploited the demographics it professed to assist. The firm's detailed report contains internal system screenshots, employee messages, and allegations of financial misreporting.
The report comes at a time when there has been a banking crisis going on with Silicon Valley Bank (SVB), Signature Bank, and Silvergate collapsing this month following a bank run. Recently, Switzerland's second-largest bank, Credit Suisse's demise, sent shockwaves through financial markets, which UBS purchased for $3.2 billion as part of a government-backed, cut-price deal.
Already, concerns about the strength of consumer spending amid inflation and a potential economic downturn have clouded the outlook for the payments industry, causing Block's shares to plummet over 60% last year.
Now, Hindenburg had taken issue with Cash App's practices during the Covid pandemic, particularly when the government distributed stimulus checks to eligible Americans. Cash App allows users to transfer money through a mobile app and is marketed as an alternative to traditional banking services.
It cited a tweet from CEO Jack Dorsey that Cash App's frictionless technology would allow users to receive government payments “immediately” without a bank account. However, just a few weeks after Cash App began distributing the initial round of government payments, states attempted to recover suspected fraudulent payments, with Washington State requesting over $200 million from payment processors and Arizona seeking to recover $500 million, as stated by multiple former employees.
The report also accused Block of engaging in predatory practices and disregarding compliance regulations to drive growth and profit from fraud against consumers and the government.
Hindenburg alleged that pressure from management had led to a pattern of disregarding Anti-Money Laundering (AML) and Know Your Customer (KYC) laws, as per interviews with former employees. The report further suggested that this was a strategy to increase Cash App's user base by selectively ignoring AML rules.
The firm tested out this theory by opening accounts under the names of former President Donald Trump and Tesla CEO Elon Musk. It then obtained a Cash App card, known as the Cash Card, under the “obviously fake Donald Trump account,” and the card bearing Trump's name arrived in the mail “promptly,” it said.
“Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual,” the report added.
Hindenburg further accused Block of misleading investors by providing misleading active transacting metrics filled with fake and duplicate accounts, thereby obscuring the number of people using Cash App.
Block reported a 16% year-over-year increase in monthly transacting activities, with 51 million during December 2022, according to their Q4 earnings letter.
Hindenburg accused the payment company of earning up to $892 million in revenue from interchange fees, which make up roughly 35% of Cash App's revenue.
The short seller claimed that the revenue should be capped by law, but Block circumvented the regulation by routing the revenue through a small bank. Hindenburg suggested in its report that Block is under investigation by the US Securities and Exchange Commission (SEC), citing a Freedom of Information Act request.
Hindenburg also alleged that co-founders Dorsey and James McKelvey sold over $1 billion in stock and other executives, including finance chief Amrita Ahuja and Cash App lead manager Brian Grassadonia also dumped millions of dollars during the pandemic while the company's share price surged.
“In sum, 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.
Jack Dorsey's Block Vows to Fight Back
The report by Hindenburg Research has significantly impacted the fortunes of Jack Dorsey's mobile payments firm, Block. Following the report's release, Block's shares fell considerably — up to 22% in the US market, marking the company's biggest intraday decline in three years. Meanwhile, Australia-listed shares recorded a 20% decline to their lowest since November 2022.
The report has Block in the spotlight, with its ticker being the top trending on the retail investor-focused forum StockTwits.
The controversy comes as Block grapples with challenges in the cryptocurrency industry, which forms a large chunk of its revenue base. The company allows people to trade crypto through its Cash App. Last month, Block said it was “meaningfully slowing” the pace of hiring this year to control costs.
Block, however, has denied all the accusations, stating that it plans to work with the SEC to explore legal action against Hindenburg.
“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price. We have reviewed the full report in the context of our own data and believe it's designed to deceive and confuse investors,” said Block in a statement, adding, “We will not be distracted by typical short-seller tactics.”
The payments company maintains that it is highly regulated and confident in its products, reporting, compliance programs, and controls.
Dorsey, who founded the company in 2009 to disrupt the credit card industry, is Block's largest shareholder, with a stake of around 8%. Following the report, as the company share prices took a hit, Dorsey's personal stake in Block, too, dropped by $526 million, the biggest decline in a single day since May.
The Hindenburg's Block report is reminiscent of the short-sellers previous market rout of over $100 billion in India's Adani Group.
Hindenburg also Shorted Adani Group This Year
In January of this year, Hindenburg Research published a report on the Adani Group, accusing the company of stock manipulation and the improper utilization of tax havens and raising concerns about the conglomerate's high debt levels. As a result, the company's publicly traded stocks experienced a massive drop in market value, losing a staggering $130 billion.
As a result, the fortunes of Gautam Adani, the Chairman of Adani Group, took a serious hit. Concerns over corporate governance and accounting fraud have led to a decline in Adani's overall net worth, which is down 60% from its peak, as per the M3M Hurun Global Rich List.
While Adani has denied these allegations, the $28 billion damage to his net worth has led to him losing his position as India's richest individual.
But the important question is – is the Hindenburg approach ethical or even legal?
Hindenburg Research's approach to researching and publishing reports on publicly traded companies is legal and generally considered ethical as long as the firm does not engage in any fraudulent or manipulative practices.
It is not illegal to short-sell a stock or to profit from a decline in its price either, even if the decline is caused by negative information revealed in a research report. However, if the firm spreads false or misleading information to manipulate the stock price, that would be illegal and unethical.
Hindenburg's reports are based on extensive research and analysis, and the firm typically provides detailed evidence to support its claims. The reports often prompt investigations by regulators or legal action by shareholders, which may or may not result in charges or penalties for the targeted companies.