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Prominent short seller Hindenburg Research reveals a short bet Campervan on Thursday claimed the online used car retailer’s recent turnaround was a “mirage” propped up by shaky lending and accounting manipulation.
The report focuses on Carvana’s loan sales practices and the business relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, Carvana’s largest shareholder.
Carvana shares fell about 3% on Thursday. The company’s shares are up nearly 400% in 2023 as it improves performance and reduces costs as part of a turnaround plan led by Ernie Garcia III.
Kavanagh declined to comment on the Hindenburg report, which is titled: “Kavanagh: Accounting Fraud Between Father and Son.”
Hindenburg said it uncovered “$800 million in loans sold to questionable undisclosed related parties, as well as details about how accounting manipulation and lax underwriting drove provisionally reported revenue growth while insiders cashed in billions USD stocks.
Hindenburg also claims that the increase in Carvana borrower deferrals was facilitated by the company’s loan servicer, an affiliate of private car dealer DriveTime and operated by Garcia II. “The company appears to be extending its loans to avoid reporting higher delinquency rates,” Hindenburg said.
CNBC could not immediately verify the claims in Hindenburg’s report.
This isn’t the first time the Garcia family and their control of the company have been targeted by some investors, including lawsuits in recent years accusing the family of running a “pump and dump” scheme to make huge profits.
Carvana went public in 2017 after being spun off from DriveTime.
DriveTime grew out of a bankrupt car rental company called Ugly Duckling, where Garcia II pleaded guilty to bank fraud in 1990 in connection with Charles Keating’s Lincoln Savings and Loan scandal. It later developed into a dealer network.
Most notably, Carvana still relies on the company for auto financing services and collections, and the two companies share revenue generated from the loans. The businesses also sometimes sell vehicles to each other, and Carvana leases several facilities from DriveTime in addition to the profit-sharing agreement.
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