SoFi digital financial platform responds to Muddy Waters' short-selling attack, considering legal action.

SoFi Technologies announced on Tuesday that it is considering legal action against the short-selling research firm Muddy Waters and said that the report released earlier that day was “inaccurate and misleading.”

After hours, SoFi’s stock rose 1%, following the company’s CEO Anthony Noto purchasing $500,000 worth of shares to boost investor confidence.

This purchase came after Muddy Waters announced a short position in SoFi, which caused the stock to drop more than 4% intraday, ultimately closing down 1.3%.

Muddy Waters described SoFi as “a financial engineering treadmill rather than a healthy growing lending company.” The firm accused SoFi of subjecting shareholders to ongoing equity dilution to allow management to achieve bonus targets through loan appreciation and off-balance-sheet structures (disguising borrowings as income).

The short seller claimed that SoFi at least understated $312 million in unrecorded debt. Muddy Waters calculated SoFi’s personal loan charge-off rate at about 6.1%, compared to the company’s reported rate of 2.89%.

Muddy Waters stated that SoFi’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was $1.054 billion, but through manipulating charge-off rates, subsidizing vendor financing sales, unrecorded borrowings, off-balance-sheet loan structures that record loan income as fees, and capitalized marketing expenses not included in key metrics, it inflated the figure by approximately $950 million.

The firm claimed that SoFi’s student loan business appears primarily designed to generate fair value gains for management bonuses. Muddy Waters described the platform as a “wet funding” forward transaction and called it a disguised lending form, with SoFi recording loan income as fee income.

According to Muddy Waters, SoFi management locked in $58 million through tools equivalent to stock sales, while publicly claiming they had not sold any shares.