“Designed to deceive and confuse”: Afterpay parent company Block considers legal action over brutal shortselling report

Block, the American fintech giant which acquired Afterpay in a $39 billion deal, has “misled” investors on key business metrics and “embraced predatory offerings”, according to a new report from infamous short-sellers Hindenburg Research.

The Jack Dorsey-led company says it is now considering legal action against Hindenburg Research for “typical short-seller tactics” intended to “deceive and confuse” investors.

In its new report, released Thursday, Hindenburg Research alleges Block, which also operates the business payment platform Square and money transfer service Cash App, has misguided both its financial backers and lawmakers.

“The ‘magic’ behind Block’s business has not been disruptive innovation,” the firm claims.

Instead, Hindenburg Research alleges Block has structured its businesses to “avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics.”

The report focuses on Cash App, the digital money transfer service which counted 51 million transactions in December alone.

Block “obfuscates” the number of Cash App users by presenting figures which include “fake and duplicate accounts”, Hindenburg Research claims.

“Block can and should clarify to investors an estimate on how many unique people actually use Cash App,” it says.

Among other allegations, Hindenburg Research claims to have successfully registered Cash App accounts under the names ‘Donald Trump’ and ‘Elon Musk’, both of which were allegedly accepted by the fintech.

“We ordered a Cash Card under our obviously fake Donald Trump account, checking to see if Cash App’s compliance would take issue — the card promptly arrived in the mail,” the firm says

Growing threats from rivals in the payments space, including Apple, are also a major concern, Hindenburg Research adds.

Afterpay in the spotlight

The report also drills down on locally-born Afterpay, saying the buy now, pay later (BNPL) provider first flourished by avoiding “responsible lending rules in its native Australia”.

Afterpay and other BNPL providers currently avoid the lending rules Australian regulators impose on banks and credit card providers by charging ‘late fees’ instead of interest.

At home and abroad, Afterpay has positioned its product as a safer alternative to traditional credit cards, which can bury users in debt.

Nevertheless, Australian lawmakers are now considering how to best incorporate BNPL providers into responsible lending regulation.

In a submission to the Treasury’s BNPL inquiry, the company said “Afterpay’s product, with its built-in consumer protections, should not be subject to mandatory credit reporting.”

Elsewhere, Block’s 2022 Corporate Social Responsibility Report states “economically vulnerable Americans benefit most from using Afterpay instead of credit cards”.

Afterpay assesses user suitability in a “nontraditional and more comprehensive manner, enabling lending to groups historically marginalized by financial institutions,” the Block report continued.

But Afterpay’s late fees can balloon into sums “worse than the most punitive debt products”, Hindenburg Research states, echoing the longstanding concerns of some Australian consumer advocates.

Bad debts accumulated by Afterpay users are rising, the short-sellers say, and increasing delinquencies “undermine Block’s claim that it is a responsible consumer product”.

Block investigates legal action as shares fall

Hindenburg Research said it had “taken a short position in shares of Block, Inc,” effectively betting that its share values would fall after the release of its report.

Block shares have fallen 16% on the ASX since the report’s release.

In a statement, Block said it intends to work with the U.S. Securities and Exchange Commission regarding the report, while considering legal action against Hindenburg Research “for the factually inaccurate and misleading report they shared about our Cash App business today.”

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price,” the company said.

“We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls,” the company continued, saying it will “not be distracted” by the scathing report.

Block is the second major business with Australian links to face condemnation by Hindenburg Research in recent months.

In January, Hindenburg Research disputed the “sky-high” valuations of assets held by multinational resources giant Adani and claimed its debts put it on “precarious financial footing”.

Like Block, Adani retorted with threats of legal action over what it called a “maliciously mischievous, unresearched” report.

Bravus, the name for Adani’s Australian mining and resources operation, also disputed the report, calling it “an intentional and reckless attempt to mislead investors using selective misinformation and discredited allegations that have been tested and rejected by India’s highest courts.”