Carvana Faces Growing Legal Troubles and Fraud Allegations

Carvana. The strange used car dealership… with a giant vending machine. A company that exploded, almost collapsed, then resurged even stronger, even joining the S&P 500. But, it might all be fraud. Since our last video, things have gotten much worse. At least six different lawsuits, and even the SEC is assaulting the company with investigations, lawsuits, and accusations. Accusations of insider trading, inflated revenue, moving risky loans around, and misleading investors. "Unbeknownst to investors, Carvana's sustainable growth machine was built on a fraudulent pump-and-dump scheme."

Carvana might just be one giant scheme to enrich these two men, at everyone's expense. If you've never heard of this company, Carvana is basically just, a fancy used car dealership, with a gimmick. That giant vending machine. They prioritized an online, fully 3d shopping experience, and let customers deposit a large coin to retrieve their car. And they're currently fighting a giant lawsuit, from multiple law firms, and shareholders. Things are so bad, that the SEC has ordered Carvana to present documents for an ongoing, formal investigation. So why is this happening? And what did Carvana do?

The two most important people in this story, are CEO Ernest Garcia III, and his father, Ernest Garcia II, a major shareholder. And this all might be one big pump and dump, to make them rich. It starts with Carvana's rather predatory business model, which unfortunately, has led a lot of people into a trap. Carvana exploded not just because of this vending machine, or their online shopping experience, but because of their financing. Carvana intentionally attracts customers with low credit. Those who might not have a ton of options to get a car. Someone left this very insightful comment on our previous video: "I worked as an underwriter for Carvana, and they're one of the most predatory car

companies. At the time, I believe the highest interest rate you could get was 28.6%. I'd say that 60% of their customers have poor credit, and so they're gonna end up in the 15-20+ % range. "So most customers will get a $15k car, and because of the interest, it's closer to $18-$20k."" This checks out. "Almost 44% of Carvana's loans it sells in ABS deals are non-prime. Over 80% of its recent non-prime ABS deals have weighted average FICO scores in the "deep subprime" range, the riskiest levels," This was especially bad with Carvana's reputation for just sending out faulty cars to these more vulnerable customers. but what we're interested in, are those loans.

This is the key to understanding Carvana's entire scheme, and why they're being accused of misleading investors, big time. In the pandemic, getting a car was cheap. Very cheap. The Federal Reserve dropped interest rates from 1.75%, to 1.25%, then, just two weeks later, all the way to 0% to 0.25%. Not only that, since supply chains were strained, there were fewer cars, so prices for new and used cars, went up. It was cheaper to finance a car, yet cars had a higher price. All of this, was perfect for Carvana. You see, Carvana isn't just a "used car company", in fact, you could argue they're more a "loan selling company".

Carvana would attract more customers with bad credit, which have high interest rates, making the loans more valuable. They would then bundle those loans together, and sell them to third parties, who want to make money on that high interest. So Carvana's actual cash engine here, isn't the car customer, it's whoever buys that giant bundle of loans. That's not illegal, in fact it's quite normal for used car companies. Carvana sells the car, the customer gets the car, and a third party gets profit from interest on the loan. The problem is who Carvana was selling these loans to. But to understand that, we need to look at why Carvana crashed so hard, right here.

And why shareholders are now suing them, and why even the SEC is investigating them. As you might have guessed, that pandemic boom didn't last forever. Carvana's stock price began to plummet. From $337 in July 2021, all the way to $4.7 in December the following year. A 98% drop… yeah. Used cars began to drop in price as the world opened up. Prices went down, and financing cars got much more expensive. But Carvana, to keep up with demand, had bought a lot of used cars, at a high price.

[Neil Saunders, Managing Director, GlobalData]: "The year has generally been poor for Carvana with losses mounting and sales declining. Much of this is related to external economic factors, which is pushing down demand for vehicles. Carvana failed to anticipate this which meant it had far too much inventory, especially earlier in the year. This dragged down profit," They had also taken on a ton of debt acquiring some other companies, despite not being profitable. Carvana was now on the verge of bankruptcy. And, this was particularly bad, because Carvana was way, way overvalued. It was also "trading at an 845% higher sales multiple relative to online car peers CarMax and AutoNation".

But it gets so much worse. In 2022, a number of law firms filed lawsuits against Carvana on behalf of investors, all with the same accusation. "Defendants billed Carvana to investors as an ecommerce company, akin to the Amazon of the used car industry. Carvana would be a seemingly limitless growth machine because the Company's disruptive model was full of competitive advantages". "Unbeknownst to investors, Carvana's sustainable growth machine was a lemon, built on a fraudulent pump-and-dump scheme to boost Carvana's retail sales growth.

Carvana and the executives filed motions to dismiss this in 2024. But, this was denied. Carvana tried again: motions to dismiss in 2025. They're denied again. So, how did this pump and dump scheme work? There is a long list of components, but most of it boils down to not telling investors about the risks the company was facing, and the profitability of each sold car. [Carvana] reported positive Retail GPU in each of Carvana's earnings calls and shareholder letters and assured investors that its retail vehicle sales were profitable. But, these cars were nowhere near as profitable as they said they were.

Carvana's actual per-vehicle profitability - or lack thereof - by: (1) excluding certain per vehicle operations expenses from its calculation of Retail GPU; and (2) not disclosing or quantifying these excluded costs separately so investors could decipher Carvana's "unit economics" (i.e., overall profitability) of retail sales on their own. Carvana intentionally hid the full cost of selling cars. Material costs, shipping cost, title and registration cost. Which, by the way, is an entirely different scandal, where Carvana just wouldn't register sold cars, leaving customers stuck with temporary license plates, for months or even a year. Another part of this big lawsuit. (show page 8 pdf)

Carvana also started hiding metrics like "average days to sale", important because it relates to a car's appreciation. They said this was because of "the relative stability of average days to sale over the past three years." But, with the pandemic car price spikes and crashes… yeah that was a lie. Shareholders didn't have the full picture, and were intentionally misled when Carvana said everything's going great! They also hid the fact that Carvana was pumping sales growth by selling "in violation of title and registration laws and regulations" and pumping sales by selling to customers further away, which makes cars even less profitable. But, we're not even done.

Remember Garcia II? The major Carvana shareholder, and father of the CEO? Well, he's not allowed to run, or even be employed by any company listed on the NYSE. Which Carvana is listed on. Why? He's a federal felon, for bank fraud. So what did he do? "He installed his son as the Company's Chief Executive Officer ("CEO") and Chairman, designed Carvana's voting structure so that he maintained more than 80% of the voting power and thus, controlled Carvana and its operations, and appointed his loyal friends (one of whom previously had been censured by the NYSE for actions he took on behalf of Garcia Senior) as board members.

You literally can't make this up. Between 2020 and 2021, in the height of Carvana's growth, both Ernest Garcia II and his son sold about $3.6 billion of Carvana stock. [Daniel Taylor, accounting professor at the Wharton School of Business]:"What I'm saying is the Garcias knew it was short-lived. The Garcias knew the music would eventually end." A stock which, they were pumping up, by misleading investors. Yet, even after all these accusations, we're still not done.

There's something else the Garcias were hiding, something massive. There are heaps of these crazy busy stories out there, many you might never hear about. And they have lots to teach us. We cover stories like these every week. If you like the sound of that, please subscribe! So you don't miss an upload. On January 2nd, 2025, Hindenburg research published a very thorough, detailed expose, titled: Carvana: A Father-Son Accounting Grift For The Ages.

They found that: In 9 months of 2024, Carvana Sold $6.15 Billion In Loans For A Gain Of $541 Million, A Metric Representing 2.2x Net Income In The Period. Not all of this is suspected to be fraud, but, $800 million of it was from an "Unrelated Third Party" It is highly suspected that Carvana sold these loans to a company called Cerberus. Their chairman is Dan Quayle, one of Carvana's directors. Why does this matter? Well for one, this makes that "unrelated third party", very much related. And under SEC rules, this has to be disclosed. And two, this means Carvana wasn't really "selling" these loans,

more just moving them elsewhere. Or, as Hindenburg Research put it: "Passing around risky loans like a hot potatoe." But it's not just loans. Over the last three fiscal years, Carvana has generated $105 million revenue from selling cars wholesale to DriveTime. DriveTime is another used car dealership and finance company. And who runs this company? Ernest Garcia II. That's right. Ernest Garcia III, also founded Carvana originally as a DriveTime subsidiary before spinning it off as its own company. A former Carvana leader confirmed that "warranty

reimbursements from related-party DriveTime were "pretty generous… back to Carvana" as a way of showing better revenue to public investors." [Former Carvana Director]: "As a related-party, we're [Carvana] able to kind of have an agreement that is favorable to pull as much of that profit forward." [Former Carvana director, wholesale inventory]: "[Selling cars to DriveTime is] a lever that's not talked about. It's kind of like Fight Club… there's certain things we don't talk about, and we don't talk about DriveTime." Feels like there should be a movie about Carvana, like The Big Short or The Wolf of Wall Street.

It was around this time that Carvana's stock had climbed back up, which was good for the Garcias. In July 2023, after the crash, Garcia III bought back $126 million in shares. The very next day, Carvana announced the "best quarter in company history". Then, when it began to climb for a second time, Ernest Garcia II sold an additional $1.4 billion in Carvana stock. Is Carvana just one big giant pump and dump? Sure seems that way, and now, things have gone beyond just lawsuits. In June 2025, the SEC issued a formal subpoena to Carvana. That means the SEC is compelling Carvana to present documents, relating to the Hindenburg claims. Speaking of documents,

let's check in on that other lawsuit. The plaintiffs, are also attempting to get documents from Carvana. Namely 112,889 emails, from a specific point in time. But Carvana failed to provide 90% of these. The plaintiff's attorney argued that "We were concerned that defendants might rig this process in a way that was set up to fail," believing the defense team has refused to use the proper search terms required to find specific documents. Carvana seemed to be intentionally unhelpful in providing these, by using searches to bury the more incriminating documents. So, the judge let the plaintiffs request up to 250 specific emails at a time, meaning Carvana can't just hide these emails in searches.

Of course, this is going to take a long, long time. But, at least Carvana can't hide them anymore. Carvana might be the strangest, albeit most interesting car dealership, ever. The giant vending machine, the pump & dump, the creative accounting. I sure wouldn't trust them with my money though. Speaking of being untrustworthy, another crazy, recent story comes from Klarna, the buy now, pay later company. At least, that's what they were. They're trying to move into the world of regular banking, but the moves they're making, aren't making investors happy. Watch this video next to learn the rest of the story.