Block (SQ) stock sank 20% after short seller Hindenburg Research said the digital payment company formally known as Square has “systematically taken advantage of the demographics it claims to be helping.”
The short seller accuses Block of a “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.”
Hindenburg states, “CEO Dorsey has touted how Cash App is in hundreds of hip hop songs as evidence of its appeal. But artists are not rapping about Cash App’s smooth user interface — many describe using it to scam, traffic drugs or even pay for murder.”
The report also alleges user counts which ballooned during the pandemic ignored “the contribution of widespread fraudulent accounts and payments.”
Hindenburg also said its research shows “Block has quietly fueled its profitability by avoiding a key banking regulation meant to protect merchants,” citing “interchange fees,” those charged to merchants for accepting use of various payment cards.
Those are capped if charged by large banks that have over $10 billion in assets. “Despite having $31 billion in assets, Block avoids these regulations by routing payments through a small bank and gouging merchants with elevated fees,” said the report.
Hinderburg also pointed to co-founders Jack Dorsey and James McKelvey collectively selling over $1 billion of stock during the pandemic.
Block’s stock is down about 59% from a year ago, when it was trading around $133 per share. On Thursday shares opened at around $58 each.
Yahoo Finance reached out to Block for a comment on the short seller report, and did not receive a reply at the time of this publication.
Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre