Muddy Waters made its name as a short-selling firm that exposed accounting trickery at publicly-traded Chinese firms. On March 17, the firm took aim at a new target: It accused SoFi, known for home and student loans, of a host of book-keeping shenanigans designed to enrich top executives at the expense of shareholders. These are the sort of accusations that, if true, could tank a company’s stock. But so far the market doesn’t appear to be buying Muddy Waters’ latest tale.
The short-seller set out its allegations on March 17, blasting out a report to journalists and social media that claimed SoFi had not actually sold a $312 million loan package but kept it on the company’s books with a sleight-of-hand financing arrangement. The Muddy Waters report also alleges that SoFi has been assigning the wrong discount rate to its student loan portfolio—essentially overvaluing it—as well as understating its exposure to loans in default.
“We believe SOFI is a financial engineering treadmill—not a healthy origination business. SOFI shareholders are incessantly diluted so management can hit bonus targets through GE Capital-style loan marks and Enron-esque off-balance-sheet structures that disguise borrowings as revenue,” said the report.
While such reports by Muddy Waters and others have in the past proved devastating, this one appears to be a misfire. While the report produced a minor dip in SoFi’s stock when it was published, the stock has since performed more or less in line with the S&P 500, while faring better than its fintech peer Chime.
The likely reason why SoFi stock has not cratered is that the allegations set forth in Muddy Waters’ report appear to be off the mark. In a research note by Mizuho, prominent analyst Don Dolev notes the report “has an impressive amount of detail and analysis” but that it misunderstands or mischaracterizes key facts related to the loan sale, discount rate and more.
In an interview, a person close to SoFi, who asked not to be named due to legal constraints, told Fortune that the company had concluded the short seller’s allegations were wrong, but decided not to publicly address them since they did not appear to be having an impact on the market. The person added that SoFi has told Muddy Waters it is contemplating legal action, potentially for defamation, but has not decided if it will take that step.
In response to questions about the Mizuho analyst’s conclusions, Muddy Waters founder Carson Block told Fortune by email that the analyst had misunderstood its findings.
