Carvana sells cars online and through in-person “vending machine” stores across the country.
Joe Raedle/Getty Images
Two big North American pension funds that invested in
Carvana
say that company leaders enriched themselves by fraudulently driving up the company’s share price with an unsustainable sales-growth campaign, then cashing out of the stock before it tumbled, according to a civil complaint filed this week.
The complaint, filed in U.S. District Court in Arizona on Tuesday, alleges that investors, including lead plaintiffs United Association National Pension Fund and Saskatchewan Healthcare Employees’ Pension Plan, suffered heavy losses as a result of the “pump-and-dump” scheme orchestrated by Carvana founders and executives.
The suit accuses the father-and-son duo who founded the company, Ernest Garcia II and Ernest Garcia III, and other company officials of multiple Securities Act and Exchange Act violations, including allegations of making materially false and misleading statements.
It seeks to recover undisclosed damages on behalf of the pension funds and other investors. Attorneys for the plaintiffs indicated in the complaint that they intend to seek class-action status for their claims.
“While investors suffered billions of dollars in damages, defendants’ fraudulent conduct permitted them to walk away with billions of dollars,” the attorneys, led by Daniel S. Drosman with the firm Robbins, Geller, Rudman & Dowd, wrote in the complaint.
Carvana didn’t respond to messages on Thursday from Barron’s seeking comment.
The United Association National Pension Fund, based in Alexandria, Va., handles retirement plans for members of the United Association labor union, which represents plumbers and pipe fitters in the U.S. and Canada.
The Saskatchewan Healthcare Employees’ Pension Plan is the largest defined benefit plan in the Canadian province, serving the majority of healthcare employees there, according to its website.
The pension funds were named lead plaintiffs after a monthslong legal process in which they demonstrated themselves to have sustained the greatest losses among investors pressing similar claims against the company.
Together, the funds were down $13.3 million on their Carvana stock purchased from August 2020 through April 2022, according to a legal filing from late last year.
Neither group responded to messages seeking comment on the lawsuit.
Their complaint tracks Carvana’s stock market performance through a period spanning from May 2020 through November 2022, which saw company shares rise to a high of $376 before plummeting to $7.39. They were trading at about $12 on Thursday after a recent rally.
Attorneys allege in the lawsuit that the Garcias and other Carvana leaders took steps to boost the company’s stock price by inflating its retail sales through “a series of unsustainable machinations.”
These included lowering the company’s purchasing and verification standards to get more trade-in vehicles and expanding into new markets it lacked the infrastructure to support, according to the complaint.
Carvana’s leaders also violated state title and registration laws “to quickly push through sales,” the plaintiffs’ attorneys allege. Barron’s has reported that some Carvana customers haven’t been able to legally drive vehicles purchased from the company for months because it failed to register cars in their names,
When the stock rose, the Carvana leaders named as defendants in the suit “dump[ed] more than $3.87 billion of their personally held shares on unsuspecting investors,” attorneys allege.
Garcia II alone received more than $3.6 billion in sales proceeds, according to the complaint.
Robbins Geller, which specializes in securities litigation and shareholder rights cases, has in the past obtained large settlements from companies including Wells Fargo, Blackstone, and Pfizer.
Drosman was a lead attorney in a suit accusing Twitter of deceiving investors about the platform’s user metrics that resulted in an $810 million settlement deal in 2021.
Their complaint against Carvana opens a new front in legal challenges faced by the auto retailer. A separate lawsuit filed in Pennsylvania on behalf of customers, for which class-action status is also being sought, alleges that Carvana committed fraud and other offenses by failing to timely register their vehicles.
Carvana has said that the customers’ lawsuit is based on a small number of delays that aren’t reflective of most peoples’ experiences with the company.
In January, Carvana settled complaints over late vehicle registrations and misuse of temporary license plates with officials in Michigan and Illinois that involved admissions that it had broken the law in those states.
Write to Jacob Adelman at jacob.adelman@barrons.com
Credit: marketwatch.com