Hindenburg Research on Thursday disclosed short positions in Block Inc and alleged that the Jack Dorsey-led payments firm overstated its user numbers and understated its customer acquisition costs.
Shares of Block slid 20 per cent to $57.85 in pre-market trading following the report. If losses hold through the session, shares could record their steepest percentage fall since March 2020.
"Our 2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping," the short seller said in a note published on its website.
Block did not immediately respond to a Reuters request for comment.
The U.S. short-seller, behind a market rout of over $100 billion in India's Adani Group, said in its report that former Block employees estimated that 40-75 per cent of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.
Reuters could not verify the claims raised in the report.
Hindenburg added that Block "obfuscates" how many individuals are on the Cash App platform by reporting misleading "transacting active" metrics filled with fake and duplicate accounts.
Hinderburg added that co-founders Jack Dorsey and James McKelvey collectively sold over $1 billion of stock during the pandemic as the company's share price soared.
Other executives, including finance chief Amrita Ahuja and the lead manager for Cash App Brian Grassadonia also dumped millions of dollars in stock, the report added.
About 5.2 per cent of Block's free float shares were in short position as of March 22, according to Ortex data. The company's ticker was third-most trending on retail investor focused forum StockTwits.
Last month, Block said it is "meaningfully slowing" the pace of hiring this year to control costs.
Founded in 2017 by Nathan Anderson, Hindenburg is a forensic financial research firm that analyses equity, credit and derivatives.
Hindenburg invests its own capital and takes short-positions against companies. After finding potential wrongdoings, the company usually publishes a report explaining the case and bets against the target company, hoping to make a profit.
Short sellers typically sell borrowed securities and aim to buy these back at a lower price.