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Hindenburg Research Targets Carvana, Claims Financial Manipulation
Short-selling firm Hindenburg Research made headlines on Thursday by revealing a significant bet against Carvana, the online retailer specializing in used cars. The firm’s analysis suggests that the company’s recent progress is merely an illusion, allegedly supported by precarious loans and questionable accounting practices.
The report draws attention to Carvana’s methods of conducting loan sales, as well as the intricate relationship between its CEO, Ernie Garcia III, and his father, Ernest Garcia II, who is the company’s predominant shareholder.
Following the announcement, Carvana’s stock price fell approximately 3%. This decline is notable given the stock’s remarkable surge of nearly 400% throughout 2023, attributed to the firm’s efforts to enhance operational efficiencies and address financial health under Garcia III’s leadership.
While Carvana refrained from making any statements regarding the allegations presented in Hindenburg’s report, which has been provocatively titled, “Carvana: A Father-Son Accounting Grift For The Ages.”
According to Hindenburg, its investigation uncovered a staggering $800 million in loan sales linked to a potentially undisclosed related party. The firm contends that these maneuverings, coupled with reports of relaxed underwriting standards, have temporarily inflated income figures, while insiders have profited handsomely by liquidating billions in stock.
Furthermore, the report raises concerns about an uptick in the number of extensions granted to borrowers, a situation allegedly facilitated by Carvana’s loan servicer, a branch of DriveTime, which is managed by Garcia II. Hindenburg claims that the company appears to sidestep the reporting of increased delinquencies by offering loan extensions to clients.
As of now, CNBC has been unable to confirm the assertions made in Hindenburg’s analysis.
This scrutiny of the Garcia family’s influence over Carvana is not unprecedented, as they have previously faced accusations from various investors. In recent years, lawsuits have surfaced, alleging that the Garcias have engaged in a “pump-and-dump” scheme aimed at enhancing their personal wealth.
For context, Carvana went public in 2017 after separating from DriveTime, which itself has an intriguing backstory. The dealership network was once a bankrupt rental car business under the name Ugly Duckling. Garcia II had previously pled guilty to bank fraud in 1990, an offense linked to Charles Keating’s Lincoln Savings & Loan scandal, but he managed to transform DriveTime into a successful automotive dealership operation.
It’s significant to note that Carvana continues to rely heavily on DriveTime for various services, including automotive financing servicing and collections. The two companies share revenue from loans, engage in vehicle sales to each other, and Carvana also leases properties from DriveTime while maintaining profit-sharing agreements.
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