Carvana Stock Sales by CEO’s Father Probed in Delaware Court

Nearly a year of stock sales by Carvana Co.'s largest investor amid state regulatory challenges and the Covid-19 pandemic were probed Wednesday by Delaware’s highest court, whose questions focused on the trades’ timing and motivation.

A lower court should have drawn inferences about a trading schedule in the plaintiff’s favor until its details are revealed, said Daniel Tepper of Levi & Korsinsky LLP. Tepper’s client is seeking to revive insider trading claims that Ernest Garcia II, father of the used car retailer’s CEO, began unloading over $3.6 billion in Carvana stock before the company disclosed that its failure to comply with varying state motor vehicle title and registration laws could hurt the business.

Garcia sold stock almost daily for some 300 days, starting in October 2020, said Justice Karen L. Valihura.

“How does that affect your theory he was selling in response to specific events?” she asked Tepper.

Carvana and Garcia have said all but one of the stock sales fell under a predetermined trading schedule that was adjusted as the company’s share price rose. But the company hasn’t produced details about Garcia’s trading plan, and the Delaware Chancery Court should have drawn inferences about it in plaintiff Rhonda Schertz’s favor at this stage in the litigation, Tepper told the Delaware Supreme Court’s full five-member panel.

Carvana and Garcia would have the opportunity to produce the plan in discovery, but until then, “no inferences should be drawn as to whether these plans were appropriately entered into, and about whether the plans were appropriately modified,” he said.

The number of shares sold each day increased as Carvana’s stock price increased, said Andrew Clubok of Latham & Watkins LLP, representing Garcia. “Notably, each one of those changes comes before months and months and months of sustained, continued growth,” he said. “They’re not timed before some big drops.”

Chancellor Kathaleen St. Jude McCormick, the Chancery Court’s chief judge, dismissed Schertz’s complaint in September. Clubok noted that a federal court in Arizona had dismissed insider trading claims on similar grounds in February 2024.

Rather than showing that Garcia must have known material, non-public information, Schertz only has to plead that “the information is knowable and Mr. Garcia was in a position to know it,” Tepper said. “It’s a very low standard.”

Justice Abigail M. LeGrow pressed Tepper on how Schertz’s complaint shows that Garcia’s position went “past a bare-bones relationship” with the company and met that standard.

Garcia controls 84% of Carvana’s voting power, and the company acknowledges in SEC filings that his family controls the company, Tepper replied. Following state title and registration laws is central to the company’s core operations, and it’s “conceivable” that Garcia knew information that wasn’t public and was motivated to sell his stock because of it, he said.

Other lawsuits in Chancery Court also have targeted Garcia and CEO Ernest Garcia III over Carvana’s pandemic-era finances. In March 2024, McCormick concluded the board’s special litigation committee properly investigated claims that the Garcias benefited financially when the company refinanced during market panic in early 2020. The same judge in September 2023 ruled against a shareholder’s challenge to Carvana’s stock structure, which assigns supervoting rights to shares held by the Garcias.

Schertz is also represented by Ashby & Geddes PA and Robbins LLP. Garcia and Carvana are also represented by Ross Aronstam & Moritz LLP.

The case is Schertz v. Garcia II, Del., No. 446,2024, oral arguments 4/16/25.