The billionaire father and son behind online used car seller Carvana have been accused of insider trading in a lawsuit filed in Delaware by shareholders. The suit, first reported by Bloomberg Law, alleges that Ernie Garcia II, and his son, Ernie Garcia III, engaged in self-dealing, using the coronavirus pandemic as an excuse to buy shares at “bargain basement” prices even though they knew Carvana had “a strong balance sheet.”
The suit was filed by pension fund shareholders in St. Paul, Minnesota, and also names the company’s directors and investment firms controlled by the Garcias. Carvana did not respond to a request for comment from Forbes.
Forbes estimates that Garcia II, Carvana’s biggest shareholder with a 38% stake, is worth $6.2 billion. His 38-year-old son, worth $2.6 billion, is the cofounder and CEO of Carvana.
Carvana stock began to nosedive in late February this year amid the pandemic. On March 30 and April 1, the company sold 13.3 million Class A shares at $45 each, raising $600 million in an offering that was only open to company insiders and “certain existing investors,” according to Carvana’s press release. On May 6, Carvana announced first quarter earnings, posting a larger-than-expected loss of $183 million but strong revenue growth of 45% year over year. The following morning, Carvana announced it was expanding its “soon-as-next-day touchless home delivery” to 100 more cities in 25 states, wiping out all of its previous stock price losses and ending the day up 10%. The surge increased the Garcias’ net worth by $2 billion combined from the week prior. On May 18, Carvana announced a public offering of 5 million Class A shares at $92 a share.
The suit claims that in late March, when the first share offering took place, Carvana stock was trading in an “artificial trough” and that “insiders used their knowledge of the Company’s actual performance—before the results of that quarter were published—to take a larger chunk of the Company on the cheap.” It goes on to claim that “Carvana (as the Garcia Parties knew) was uniquely positioned to address growing customer demand in safer car-buying experiences and had experienced massive growth between February and March.… By selling Carvana shares to the Company’s controlling stockholders for a bargain-basement price, Defendants robbed the Company of tens and perhaps hundreds of millions of dollars of capital.”
In the first quarter earnings call, Carvana CEO Garcia III said “Prior to the pandemic, one of the questions they asked customers was something along the lines of, would you consider buying a car online?” referring to a survey done by CarGurus, a car review website. “And at that time, something like 32% of customers raised their hand and said, I would consider doing that… But several weeks ago, that number had jumped up to about 61% of customers that said they would consider buying a car online. So we do think that in this new environment, we have a very, very desirable offering.”
This isn’t the first time the older Garcia has been accused of self-dealing. He owns and runs used car retailer DriveTime Automotive, which was called Ugly Duckling when he bought it in 1992. Garcia II was hit with six shareholder lawsuits in 2001 alleging he abused his position to profit from Ugly Duckling assets. The suits were combined and settled that year. He denied the accusations in a 2001 interview with Forbes and argued that Ugly Duckling also benefited. A year before buying Ugly Duckling, Garcia II pled guilty to a bank fraud charge related to his dealings at Lincoln Savings & Loan. In 2002, Ugly Duckling was taken private and renamed DriveTime. Carvana was cofounded by his son as a subsidiary of DriveTime Automotive before being spun out as its own public company in 2017.
Source: Forbe Billionaires