Dive Brief:

• After an investment firm issued a controversial report last Thursday that took aim at digital payments company Block and its Cash App money transfer business, some analysts called on Block to release more business statistics and information about its anti-fraud practices.
• Block rebutted the report and issued a statement the same day calling the report from Hindenburg Research “factually inaccurate and misleading.” Block also said it’s exploring legal action against the firm and is in touch with the Securities and Exchange Commission. “We intend to work with the SEC and 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 its statement.
• Nonetheless, analysts who follow Block paid attention to the Hindenburg report. “Unfortunately, questions have been raised in the Hindenburg report, and even if false, it's likely to weigh on sentiment and could spur further regulatory scrutiny of the (peer-to-peer) space,” Oppenheimer & Co. Analyst Dominick Gabriele wrote in a Thursday note to investor clients.

Dive Insight:

New York City-based Hindenburg says on its website that the firm specializes in forensic financial research. Hindenburg was founded in 2017 by Nathan Anderson, who has worked in the hedge fund industry at several firms over the past decade, according to his LinkedIn profile. He also previously worked at data company FactSet Research Systems, Reuters reported in January when it covered a Hindenburg report related to another company.

In its report on Block, Hindenburg alleged, among other things, that Block inflated user metrics and allowed fraud on its Cash App platform.

In response to the report, Block said Hindenburg is “known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price.” Block contended the report seems designed to deceive or confuse investors, and the company won’t be “distracted by typical short seller tactics.” 

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls,” Block said in the statement.

Block didn’t further describe its communications with the SEC with respect to the Hindenburg report. Block spokespeople didn’t immediately respond when asked for more detail on the contact with the SEC.

Hindenburg Research has been identified by some news outlets as a short seller, which is an investment firm that takes stock positions that profit from the decline in a company’s stock. Still, Hindenburg noted in its report on Block that it intends “to continue transacting” in the company’s securities and may be long, short, or neutral, regardless of its initial recommendations or conclusions.

Block’s stock price began declining on Tuesday last week, in the days before the report was publicly released, dropping nearly 22% by last Friday, before beginning to recover this week. In morning trading today, the stock remained about 14% below its closing price on Tuesday last week.

As the stock price decreased, the net worth of Block co-founder and CEO Jack Dorsey fell $526 million, Bloomberg reported.

Hindenburg said its report on Block followed a two-year investigation. The investment firm’s report has received attention partly because it has issued some impactful reports in the past. Hindenburg is known for these in-depth reports which make very specific claims, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business, noting that the company “can't blow it off.”

In 2020, Hindenburg published a report on Phoenix-based electric truck maker Nikola, alleging that company deceived investors; Nikola’s founder, Trevor Milton, was convicted in 2022 of defrauding investors, according to The New York Times.

Some of the points raised by Hindenburg regarding Block caught the attention of analysts who cover that San Francisco-based company, which also owns the buy now, pay later business Afterpay. They suggested more information from Block could help allay concerns. 

“While we understand that (Block) doesn't want to give credence to short-seller reports, we also think further detail on (monthly active users) and (know your customer) practices would be welcomed by investors,” Wolfe Research analysts wrote in a Thursday note to investor clients.

Wolfe analysts pointed out that third-party app data on Cash App’s monthly active users generally matches what the company has reported. In its fourth quarter earnings materials, Block said Cash App had 51 million monthly transacting active accounts across the U.S. and Europe in December. That referred to accounts that had at least one transaction using a Cash App product or service during that time period.

The Hindenburg report makes “valid arguments” – including drawing attention to the fee Block charges for its instant deposit feature – which “might increase regulatory scrutiny,” Mizuho Securities analysts wrote in a Thursday note to clients.

In the Oppenheimer note to investors, Gabriele said Block “should share special data given the magnitude of these allegations.” 

Peer-to-peer payments likely experience more fraud than credit cards, he said, noting PayPal erased 4.5 million accounts after it reviewed 2021 activity. “An internal review process that likely will be done by (Block) given the spotlight from this report could result in a culling of accounts similar to measures taken by (PayPal),” Gabriele wrote. 

Additionally, “we expect (Block) to explain/report tighter controls for customer acquisition and review its customer base,” Gabriele wrote in his note.

Analysts largely brushed off Hindenburg’s unsubstantiated allegations that Block is complicit with criminal activity tied to Cash App, noting Zelle or other bank products also risk being used in a fraudulent or criminal way.

Block spokespeople didn’t respond to requests for comment on analysts’ points.

The Consumer Financial Protection Bureau sued Block last August, accusing the company of “slow-walking” its responses to a Cash App-related probe by the agency, Reuters reported. In November, a federal judge ordered Block to comply with those investigative demands made by the CFPB.

The CFPB declined to comment Tuesday on the status of the Cash App-related probe.

In addition, Block has received demands for information from attorneys general in multiple states over Cash App’s handling of customer complaints and disputes, the company disclosed last year in its annual filing with the SEC.