‘Wild West’: Afterpay parent Block accused of facilitating fraud

Shares in Jack Dorsey’s payments giant plunged more than 20 per cent after short-seller Hindenburg was able to obtain a Cash App card under an ‘obviously fake Donald Trump account’.

Hindenburg alleges founder Jack Dorsey and other executives sold over $US1bn of stock through the alleged fraud period. Picture: Jim Watson/AFP

Afterpay parent company Block has seen more than $8bn wiped off its market value, after

a scathing attack by short-seller Hindenburg Research claimed the company has inflated its user numbers and helped facilitate fraud.

In a report released on Friday morning (AEDT), Hindenburg Research claimed Block’s internal systems took a “Wild West” approach to compliance, and that former employees estimated that between 40 per cent to 75 per cent of accounts on the Block platform were either fake or involved in fraud.

Hindenburg, which revealed a short position in the Jack Dorsey-led payments outfit, said its report followed a two-year investigation.

Block’s ASX-listed securities tumbled more than 20 per cent on the news — hitting a four-month low — before paring losses slightly to close down 18.4 per cent to $89.03, following a 15 per cent slide on Wall Street.

The short-selling group recently launched a similar attack on Indian mining giant Adani, which wiped $US100bn from that company’s valuation.

Friday’s report said it had spoken with multiple former Block workers who claimed their concerns were ignored despite “criminal activity and fraud running rampant on its platform.”

It also said the company’s Cash App had far fewer actual users than claimed, given its metrics were “filled with fake and duplicate accounts.”

Cash App, a rival to PayPal that enables instant cash transfers, has been described by Block as a key plank of its growth strategy.

To test its thesis, Hindenburg Research opened accounts in the name of Tesla chief executive Elon Musk and former US president Donald Trump, then obtaining a Cash App card under the “obviously fake Donald Trump account”, which “promptly” arrived in the mail.

Hindeburg created fake Block accounts in Donald Trump and Elon Musk's names. Source: Supplied.

Hindenburg also claimed Block helped facilitate pandemic relief fraud, and that the company had obvious compliance lapses that made fraud easy, such as permitting single accounts to receive unemployment payments on behalf of multiple individuals, and ineffective address verification.

“Massachusetts sought to claw back over 69,000 unemployment payments from Cash App accounts just four months into the pandemic.

“Suspect transactions at Cash App’s partner bank were disproportionate, exceeding major banks like JP Morgan and Wells Fargo, despite the latter banks having four to five times as many deposit accounts,” the report states.

“In Ohio, Cash App’s partner bank had eight times the suspect pandemic-related unemployment payments as the bank that processed the most unemployment claims in the state, even though the latter bank processed two times the claims as Cash App’s, according to data we obtained via a public records request.

“As Block’s stock soared on the back of its facilitation of fraud, co-founders Jack Dorsey and James McKelvey collectively sold over $US1bn of stock during the pandemic. Other executives, including CFO Amrita Ahuja and the lead manager for Cash App Brian Grassadonia, also dumped millions of dollars in stock.”

Shares in Block, which is dual-listed on the ASX and New York Stock Exchange, had already fallen 40 per cent in the last 12 months — from a peak of $194.36 on March 30, 2022 — reflecting downward pressure from rapidly rising interest rates around the world.

On Friday it closed with a market capitalisation of $48.2bn.

However, Block has escaped the sweeping staff lay-offs executed at some of its biggest rivals.

Meanwhile, the net worth of its billionaire chief executive Jack Dorsey plunged by $US526m — some 11 per cent — on the back of Friday’s rout.

A Block spokeswoman said the short-selling attack, which it viewed as a shot at its chief executive Jack Dorsey, was “designed to deceive and confuse investors.”

“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,” a Block spokeswoman sad in a statement.

“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.

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics.”

Hindenburg also criticised Afterpay’s rising delinquency rate, which The Australian recently reported.

“From a financial perspective, the Afterpay acquisition looks to be a dud. Prior to Block’s acquisition, Afterpay reported remarkably low delinquency rates. Those have surged following the acquisition, according to a report citing Fitch Ratings data,” the report reads.

Morgan Stanley said the prevalence of potentially fraudulent accounts associated with the Cash App platform might be a “key concern/question for investors.”

“We think most investors have two key questions post publication of this report,” Morgan Stanley analyst James Faucette said on Friday.

“These questions are: how widespread is the alleged fraudulent account issue within Cash App, and if true, its impact to revenue once resolved; and whether the current general banking environment led to a faster regulatory review or interruption of business than would have happened eventually.

“We believed this could eventually lead to a culling of some fake or fraudulent accounts, and that investors should be prepared for a potential downshift in Cash App user growth or monetisation.”

Currently only available in the US and the UK, Cash App allows users to transfer money to one another immediately for a flat 1.5 per cent fee.

Work is currently underway on integrating Afterpay into its functionality.

Block, which acquired Afterpay in 2022, is now looking to expand its Cash App to new markets including Australia, an effort being led by former NAB and Suncorp executive Lee Hatton, who served most recently as Afterpay’s executive vice president.

Block CFO Amrita Ahuja is leading efforts to expand Cash App to Australia. Picture: Jane Dempster

Block chief financial officer Amrita Ahuja said in a recent interview with The Australian that Block’s Australian engineering talent would help differentiate Cash App from rivals when it is eventually launched here. She did not disclose a timeline for the app’s local launch.

“One thing that’s unique about Cash App is that we can leverage the social graph, it’s a peer-to-peer money transmission app. That’s a core value proposition,” she said.

“Today you can send money not only using fiat currency but also bitcoin, or stocks or a gift card when you’re interacting with a friend or another business with Cash App.

“We can do things with our products that are unique given all of these different elements that we’ve got within the Cash App.”