Shares of Jack Dorsey’s financial technology company Block tanked by more than 20 percent Thursday after U.S. short-seller Hindenburg Research alleged that the Silicon Valley-based payment conglomerate — owner of the hugely successful CashApp — had facilitated fraudulent activity.

Criminal activity on Cash App included payments for illegal drug sales and sex trafficking, according to Hindenburg’s investigative report, which cited as evidence several rap lyrics describing the use of Cash App to pay for drugs or assassination attempts.

Hindenburg, which became a household name earlier this year after targeting Indian billionaire Gautam Adani‘s companies, alleged that Block allowed criminal activity to operate with lax controls, highly “overstated” Cash App’s user base — a key metric of performance — and “understated” customer acquisition costs.

Cash App made almost $3 billion in gross profit in 2022, its highest reported annual profit.

Block responded to the short report, describing it as “factually inaccurate and misleading” and it said it intends to work with the Securities & Exchange Commission 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,” Block said in a statement. “We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse.” investors.

Shares of Block (SQ) were trading at $61.89 with a $35.4 billion market cap as of this writing, down 14 percent vs. 22 percent after recovering some of its losses. SQ was trading at close to $75 on March 22.

Hindenburg went public after a two-year investigation, announcing it had opened a short position on Block shares, betting they would fall.

Among its claims, Hindenburg said it discovered that Cash App probably helped scammers exploit government stimulus plans during the pandemic. Responding to a public records request, the state of Massachusetts told Hindenbug that it hoped to recoup more than 69,000 unemployment payments from the bank behind Cash App accounts — a total sum greater than much larger banks such as JPMorgan and Wells Fargo.

Cash App profited by catering to the “unbanked” but Hindenburg concluded that Block “embraced predatory offerings” and has “systematically taken advantage of the demographics it claims to be helping.” Hindenburg also alleges systemic issues with Cash App’s compliance protocols and claims several former employees spoke about how internal issues and user complaints were disregarded.

“The ‘magic’ behind Block’s business has not been disruptive innovation, but rather the company’s 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,” Hindenberg wrote in its March 23 report.

Block’s shares rose during the pandemic — something the company attributed to the explosion of online shopping — but Hindenburg said was due in part to fraud on its platforms, prompting executives such as co-founders Dorsey and James McKelvey to dump more than $1 billion worth of stock.

Known as Square until late 2021, Block was co-founded by Dorsey in 2009 as a platform for merchants to take card payments. It later added Cash App, the buy-now-pay-later platform Afterpay and the music streaming service Tidal.

“Our research shows Block has quietly fueled its profitability by avoiding a key banking regulation meant to protect merchants,” Hindenburg reported.

Dan Dolev, an analyst at Mizuho, the third-largest financial services company in Japan, agreed the report makes some good points, but said some arguments aren’t as strong.

“While the report makes valid arguments, such as the slowdown in inflows and sustainability of the instant deposit fees, which might increase regulatory scrutiny, other claims & risks around high, unregulated interchange fees and definition of monthly users are well known to investors,” the analyst explained. “Other aspects of the report, like making inferences from songs or adding back SBC after SQ publicly shifted focus to include non-cash expenses in operating income, may hold less water …

“…As a reminder,” Dolev added, “the near-term bull case on SQ remains reaching better than expected profits helped by cost control.”

READ MORE: Here’s What Legal Scholars Say About Using Rapper Lyrics In Criminal Cases

Images: Former Twitter CEO Jack Dorsey testifies on Capitol Hill, Sept. 5, 2018. (AP/Jose Luis Magana) / Hindenburg photo by Sam Shere, in the public domain, https://flickr.com/commons
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