Short-seller Muddy Waters targets SoFi Technologies as stock price declines

Investing.com – SoFi Technologies’ stock fell about 4% on Tuesday after short-selling firm Muddy Waters Research announced a short position in the company’s shares.

According to the statement, Muddy Waters described SoFi as “a financial engineering treadmill, rather than a healthy-growing lending business.” The firm accused SoFi shareholders of facing ongoing dilution to enable management to achieve bonus targets through loan valuations and off-balance-sheet structures that disguise debt as income.

The short seller claimed that SoFi has at least $312 million in unrecorded debt, which represents a significant misstatement. Muddy Waters said this increases the likelihood of broader undiscovered misstatements.

Muddy Waters calculated SoFi’s personal loan charge-off rate at approximately 6.1%, compared to the company’s reported rate of 2.89%. The firm indicated that SoFi’s student loan business appears primarily designed to generate fair value gains for management bonuses rather than for strategic or economic reasons.

The short seller described SoFi’s secured loan business as a seller-financed full loan sale program. Muddy Waters characterized the lending platform as a forward flow transaction of wet funds, calling it a disguised borrowing arrangement, where SoFi records loan income as fee income rather than as a cost-generating capital-light fee station.

According to Muddy Waters, management is rewarded through shareholder dilution. The firm stated that if none of these so-called abuses occurred, management’s performance bonuses would be significantly impacted, potentially leading to their complete cancellation.

Muddy Waters pointed out that the $1.054 billion in reported EBITDA is inflated by approximately $95 million through manipulation of the charge-off rate, subsidized seller-financed sales, unrecorded borrowings, off-balance-sheet loan structures that record loan proceeds as income, and capitalization of marketing expenses excluded from core metrics.

The firm identified at least $312 million in clearly unreported borrowings and a seller-financed sale program that failed to meet three of the sale recognition criteria under ASC 860. Muddy Waters stated that management locked in $58 million through tools equivalent to stock sales while publicly claiming no stock was sold.

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