Hindenburg Research Unveils Alleged Accounting Grift at Carvana: A Father-Son Saga Unfolds
In a stunning revelation that has sent shockwaves through the financial markets, Hindenburg Research released a bombshell report on January 2, 2025, accusing Carvana Co., the online used car retailer, of engaging in what they describe as “a father-son accounting grift for the ages.”
This report not only highlights questionable accounting practices but also points to significant insider stock sales by the CEO’s father, raising serious concerns about the integrity of Carvana’s financial reporting and corporate governance.
The report begins by outlining Carvana’s rollercoaster stock journey. After a precipitous 99% drop from August 2021 to December 2022, Carvana’s shares rebounded dramatically, increasing 63 times in value.
During this tumultuous period, Ernest Garcia II, the father of Carvana’s CEO Ernie Garcia III, sold off a staggering $3.6 billion in stock before the decline and an additional $1.4 billion after the rebound. This timing has led to speculation about whether these transactions were strategically planned, especially considering that the Garcia family holds 85% of the voting control in Carvana.
Carvana’s business model, as highlighted in the thread, revolves around selling used cars online but profits significantly from originating auto loans, which it then quickly sells to other companies.
However, with the main buyer, Ally Financial, pulling back, an $800 million mystery loan purchase by a trust linked to Cerberus Capital, where Carvana Director Dan Quayle holds a significant position, has raised eyebrows.
This transaction, according to the report, was not disclosed as a related party transaction, despite Cerberus’s connections to Carvana through Quayle.
The financial intricacies don’t stop there. The report delves into Carvana’s loan practices, revealing that 44% of loans since 2002 are underwater, with delinquency rates four times the industry average.
A former director’s statement suggests a 100% approval rate for loan applicants, which could indicate lax underwriting standards. Moreover, Carvana has been avoiding reporting higher delinquency rates by extending loans, a practice enabled by its loan servicer, which is an affiliate of DriveTime, a private car dealership run by none other than Ernie Garcia II.
Hindenburg’s report also uncovers several accounting red flags. Carvana has allegedly inflated profit metrics by about 34.5% by reclassifying $390 million in selling costs to “Selling, General & Administrative” expenses. They also carry $553 million in loans with no loss reserves, and there’s evidence of earnings manipulation by timing loan sales between quarters.
The report suggests, “You can move very large amounts of income around,” indicating significant financial manipulation capabilities within Carvana.
Adding to the controversy, Carvana reportedly created a secret “economy line” with lower standards, accepting vehicles in poor condition while misleading investors about stable vehicle quality metrics as late as August 2023.
The audit practices are also under scrutiny, with the auditor having questionable ties, including a member previously involved in sending money to the CEO’s father, and the firm itself being a mid-tier auditor for over a decade, amidst an ongoing undisclosed SEC investigation.
The financial storm brewing around Carvana is further exacerbated by its $4.8 billion in net debt, with an annual interest obligation of $215 million starting in 2025.
With used car prices dropping by 20.3% over three years and subprime delinquencies surpassing 2008 levels, the future looks bleak for Carvana. Despite this, insiders have cashed out over $5 billion, with Carvana failing to raise significant capital to mitigate balance sheet risks.
This detailed expose by Hindenburg Research has led to a complex market reaction with Carvana’s stock initially plummeting but then showing gains, reflecting the unpredictable nature of investor sentiment.
As of the latest data, Carvana’s stock price was listed at $204.50 USD, with a year-to-date increase of 111.75% as shown in the accompanying image in the X thread. This latest development in the Carvana saga underscores the importance of transparency and ethical governance in corporate America, leaving investors and the market watching closely to see how Carvana and its leadership will respond to these serious allegations.