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Carvana CEO Accused of Insider Trading on Coronavirus Fears

May 29, 2020, 3:53 PM

Carvana Co.'s controlling family was hit with a Delaware lawsuit claiming its members used coronavirus fears to buy up shares at “bargain basement” prices when they knew from inside information that the online used car platform was weathering the pandemic well.

“Although the Covid shock affected Carvana’s shares, the fundamentals of the business were still sound, as the Garcias and other corporate insiders knew,” the Chancery Court suit says, and they “were able to grab big chunks of the company on the cheap.”

In addition to CEO and board chairman Ernest C. Garcia III, the complaint filed Thursday targets his father, “billionaire used car businessman” Ernest C. Garcia II, along with Carvana’s directors and several investment firms controlled by the Garcias, who hold more than 90% of the company’s voting power.

It accuses the Garcias and Garcia II’s “billionaire buddy,” the financier Mark Walter, of engineering a stock sale at below-market prices—available to insiders only—even as Carvana shares were “in an abysmal trough driven by Covid panic.”

“Indeed, on the last trading day before the pricing for the private offering was announced, Carvana’s stock was trading near its lowest closing price in years,” the suit says.

The Garcias, “who undoubtedly had access to the company’s books and records,” allegedly knew both that its “touchless” business model would appeal to consumers during the pandemic and that it actually was performing relatively well during the crisis.

The company, which went public in 2017, had no urgent need for liquidity, given its “strong balance sheet,” the suit says. It certainly wasn’t desperate enough to justify the “suspiciously” timed and “poorly executed” offering, which “hampered its ability to tap public markets in the future,” according to the complaint.

But the board “stepped aside” and “apparently did nothing to protect Carvana’s interests in a transaction rife with self-dealing,” the suit says. “Meanwhile, the controllers received a windfall.”

The transaction allegedly “robbed Carvana of potentially hundreds of millions of dollars.”

The suit also alleges a series of unrelated self-dealing transactions involving other companies, including DriveTime Automotive Group Inc., the company founded by Garcia II, whom the complaint repeatedly refers to as an “ex-felon.”

Cause of Action: Breach of fiduciary duty; insider trading; corporate waste; unjust enrichment.

Relief: Restitution, disgorgement, damages, costs, fees, and interest.

Response: Carvana didn’t immediately respond Friday to a request for comment on behalf of itself, its board, or the Garcias.

Attorneys: The plaintiff, a union pension fund, is represented by Grant & Eisenhofer PA.

For additional legal resources, visit Bloomberg Law In Focus: Coronavirus (Bloomberg Law Subscription).

The case is St. Paul Elec. Const. Pensoin Plan v. Garcia, Del. Ch., No. 2020-0415, complaint filed 5/28/20.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Patrick L. Gregory at pgregory@bloomberglaw.com

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