SoFi Stock Plunges on Muddy Waters Short Attack

Shares of SoFi Technologies experienced a notable decline of approximately 4% on Tuesday. This downturn followed the revelation by Muddy Waters Research that it had initiated a short position against the company's stock. Muddy Waters raised significant concerns regarding SoFi's financial practices.

The research firm asserted that SoFi's business model leans heavily on "financial engineering" rather than on the organic growth of its loan portfolio. Investors are reportedly facing ongoing dilution, with management allegedly benefiting from bonus targets tied to loan valuations and off-balance-sheet structures.

Further allegations pointed to the potential for at least $312 million in unrecorded debt, raising questions about broader financial misstatements. Muddy Waters also challenged SoFi's reported personal loan charge-off rate, estimating it at 6.1% compared to the company's disclosed 2.89%.

The firm questioned the strategic purpose of SoFi's student loan segment, suggesting it may primarily serve to generate fair value gains for compensation. Other business segments, including secured loans and the loan platform, were characterized as structures functioning like borrowings but reported differently.

Muddy Waters calculated that SoFi's reported EBITDA of $1,054 million could be overstated by approximately $950 million. This potential overstatement is attributed to adjusted charge-off rates, seller-financed transactions, unrecorded borrowings, and specific accounting treatments.

The short seller also highlighted what they described as unreported borrowings and transactions that may not meet accounting standards for sale recognition. Additionally, Muddy Waters alleged that management secured $58 million through instruments resembling stock sales, despite public statements to the contrary.