In what might have made Victorian aristocrats proud given the sheer level of its inherent snobbery, Block’s (NYSE:SQ) response to the attack by the prolific short-seller Hindenburg Research has been equal parts dismissive and ambiguous, leaving ARK Invest’s Cathie Wood as the sole combatant on behalf of the stock’s bulls.
As we reported on Thursday, Hindenburg Research leveled troubling allegations against Jack Dorsey’s financial services and mobile payments company, Block (SQ). In what the stock’s bulls decried as a veritable litany of half-truths, Hindenburg Research asserted that the platform tries to squeeze money from its customers via predatory loans, high instant transfer fees, and a “Wild West” approach to compliance to artificially inflate its user base, thereby subjecting the platform’s users to an elevated risk of fraud and identity theft. The short-seller dedicated a hefty portion of its report to how Block’s Cash App was the “only” peer-to-peer e-payment service provider cited in an indictment related to COVID-relief cheques.
$SQ published a 5 sentence response to Hindenburg's report
Block's Response to Inaccurate Short Seller Report https://t.co/cHGUasv0iy
— Breakout Point (@BreakoutPoint) March 23, 2023
In response, Block issued a terse statement, merely rejecting Hindenburg Research’s allegations and vowing to pursue legal recourse against the short-seller. This statement was widely panned as tone-deaf and condescending. The company chose not to issue any specific rebuttal to Hindenburg’s allegations, assuming that its 5-liner statement would suffice.
And the result is obvious. Relative to its closing price of $72.94 on Wednesday, Block shares are down a little over 16 percent, with the company’s statement failing to reassure investors. Moreover, Jack Dorsey’s personal fortune plunged by $526 million in the aftermath.
As a result, Cathie Wood has had to step inside the proverbial arena to defend the interests of Block’s investors. After all, ARK Invest is one of Block’s biggest investors. First, Wood’s funds deployed $21 million to buy additional shares of the besieged company.
Hindenburg seems to believe that investors and analysts with deep expertise in fintech will not read its reports but that speculators and traders will support its short positions by selling without reading or understanding them. Wildly misleading, as @mfriedrichARK exposes here. https://t.co/5iueTRSMZ6
— Cathie Wood (@CathieDWood) March 25, 2023
Then, Cathie Wood herself tweeted a scathing rejoinder to Hindenburg Research’s report, terming it “wildly misleading.” ARK Invest’s Maximilian Friedrich has done a reasonably good job of dismantling Hindenburg’s key attack nodes. First, as stated by Friedrich, Block’s Cash App, as well as other fund transfer services, were responsible for just around 12 percent of the fraudulently cashed out COVID-relief funds from BofA. Moreover, many financial institutions, including legacy banks, faced elevated instances of fraud in relation to COVID stimulus cheques.
The launch of FedNow this summer might bring those and other topics back on the table. And regarding durbin-exempt debit interchange and instant transfer fees, fintech co's have a strong argument for regulators: The fees they charge for their products largely are cheaper than..
— Maximilian Friedrich (@mfriedrichARK) March 23, 2023
Of course, this does not mean that the issues highlighted by Hindenburg Research won’t have any impact on Block’s growth story going forward. Even in a sterile environment, the imminent launch of the FedNow service is likely to remove a huge selling point of the Cash App – instant transfers at a relatively affordable price.
Morgan Stanley on $SQ post Hindenburg's short report. My top pick was Afterpay as a major issue but there are other pressures here as well. pic.twitter.com/KV1YeaLzIe
— Ayesha Tariq, CFA (@AyeshaTariq) March 24, 2023
Moreover, Morgan Stanley has also chosen to take a cautious approach in the aftermath of Hindenburg Research’s report. The bank’s new investment note concedes that Block’s Cash App “seems to have lower verification requirements that potentially may not meet all standards of Know Your Client (KYC) and Anti-Money Laundering (AML) rules.” The investment note also touched on how Cash App and other fintechs are able to earn relatively high interchange fees by partnering with small banks that are exempt from the Durbin cap. As a refresher, the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act imposed a ceiling of 0.05 percent plus a flat $0.22 transaction fee in relation to bank charges for accepting payments via debit cards.
Meanwhile, this report has attracted fresh scrutiny of Hindenburg Research’s modus operandi, one which involves opening a short position prior to publishing a high-stakes report on the target, only to close the position shortly after the publication and before a meaningful response can be offered.
Do you think Hindenburg Research’s allegations against Block hold water? What do you think should be the role of short-sellers in an efficient market? Let us know your thoughts in the comments section below.
The post Cathie Wood Tries To Salvage the Fallout From Block’s Embarrassingly Tepid Response to Hindenburg Research’s Attack by Rohail Saleem appeared first on Wccftech.
