What happened

Shares of Block (SQ -1.78%) were down by as much as 20% this week, according to data from S&P Global Market Intelligence. Short-selling group Hindenburg Research released a report alleging that the company is being negligent in its oversight to prevent criminal activity on the Cash App, that it is skirting regulatory requirements for large financial institutions, and that loan quality at its “buy now, pay later” (BNPL) subsidiary Afterpay is deteriorating. Block responded to the report saying it had no merit.

As of 12:38 p.m. ET on Friday, the stock was down 18.8% this week and 79% off its all-time high. 

So what

Hindenburg Research is one of the highest-profile short-sellers on Wall Street. This is the team that uncovered the fraud going on at Nikola Motors and that recently went after Indian billionaire Gautam Adani. Investors pay attention to Hindenburg — and for good reason — as it has a strong recent track record of uncovering shady and fraudulent actors.

Hindenburg made many allegations against Block in the report, but none more important than the assertion that between 40% and 75% of the Cash App’s accounts are either “fake, involved in fraud, or were additional accounts tied to a single individual.” The Cash App is a huge growth engine at Block, with investors excited about the number of monthly active users (MAUs) it continues to add every year. At the end of 2022, Block estimated that the Cash App had 51 million MAUs, up from less than 10 million just a few years ago. If that number is being inflated by scam accounts, then Block’s prospects are likely worse than investors think. There is also the chance the company could get fined by the government for knowingly misleading investors. 

Now, to be clear, there is no definitive proof that Block has misled shareholders or that fraudulent accounts are a material portion of Cash App’s MAUs. However, the possibility adds risk to an investment in Block, which is why investors have sold off the stock this week. 

Now what

Shares of Block are now down almost 80% from their all-time high. Even before this short report, there were logical reasons for the price decline. In recent years, the company has bungled its way through two terrible acquisitions (Afterpay and Tidal) and invested in cryptocurrency projects that show no signs of bearing fruit. If its prized Cash App asset is really built on fraud and crime, that would be a huge blow to the business. 

At its current market cap of $36.5 billion, Block seems like a risky proposition for investors that could lead to even more downside if Hindenburg’s allegations prove true.