Muddy Waters Research Short-Sells SoFi Over Alleged Improper Accounting Practices

SoFi Facing Scrutiny from Muddy Waters Research

Notable short-seller and independent research firm, Muddy Waters Research, has recently released a comprehensive 28-page report on the digital bank, SoFi (SOFI 2.62%). SoFi, favoured by high-income users, is a comprehensive digital banking solution providing a wide range of services.

Offering personal, student, and home mortgage loans, online investment brokerage, depository accounts, and a suite of personal finance tools, SoFi positions itself as a comprehensive financial resource. The digital bank also runs a fintech and bank technology business that offers core processing and payment technology.

However, Muddy Waters Research is shorting SoFi due to concerns over financial engineering, alleged improper accounting practices, and a series of complex off-balance-sheet transactions. The research firm believes these issues are affecting the bank’s true business performance. Discover the full short thesis for SoFi here.

Questions Over Fair Value Marks

One of the core issues raised by Muddy Waters is the fair value marks used by SoFi. The bank generates a significant portion of its revenue from lending, specifically unsecured personal loans. These loans are originated by SoFi and sold directly to investors through multiple distribution channels and loan platform business strategies.

To mark the value of these loans each quarter, SoFi uses a discounted cash flow analysis. This includes variables such as weighted average loan yield, annual default rate, prepayment rates, and a discount rate to calculate the present value of future cash flows.

Are Loan Charge-Offs Too Low?

Muddy Waters Research argues that the calculations made by SoFi for fair value marks are incorrect, resulting in an EBITDA (earnings before interest, taxes, depreciation, and amortization) that looks far better than the reality. They contend that SoFi’s inputs in its discounted cash flow statement are “materially misleading”, whether in the charge-off rate (expected loan losses) or discount rate.

For instance, SoFi reported a personal loan net charge-off rate of 2.80% in Q4 of 2025. However, Muddy Waters argues that this rate does not reflect delinquent loans that the company sells before they reach the classification of a charge-off.

Concerns About SoFi’s Servicing Rights Asset

In addition to charge-off rates, Muddy Waters also believes that SoFi has inflated the value of its servicing rights asset (SRA). This is a premium that the servicing company takes to reflect the likely income generated over the life of the loan. Muddy Waters claims that SoFi’s rates for personal and student loans are well above market rates.

Other Irregularities

Muddy Waters has raised other concerns about SoFi’s finances. These include the capital-intensive nature of the LPB business and off-balance-sheet transactions, the low discount rates used by SoFi, and the capitalization of marketing costs. They also question the large increase in diluted shares outstanding between 2024 and 2025.

Should Investors Be Worried?

SoFi has responded strongly to the Muddy Waters report, labeling it “inaccurate” and suggesting that it “demonstrates a fundamental lack of understanding of our financial statements and business.” They are also considering legal action in response to the report.

While the report is complex and allegations of off-balance-sheet transactions are yet to be verified, it is clear that there are aspects of SoFi’s finances that warrant further investigation. The fair value marks have been a consistent issue, and SoFi’s use of more favorable inputs in its discounted cash flow marks than its peers raises questions.

While SoFi’s valuation has become more attractive, with the stock trading at 29 times forward earnings, nearly 14 times adjusted EBITDA, and about 5 times forward adjusted revenue, the concerns raised by Muddy Waters could significantly impact adjusted EBITDA if proven true.

Despite the concerns, shorting SoFi could be risky due to its loyal following. However, the current question marks over SoFi’s finances also make it a risky investment.