Carvana, the online used car dealership, has been one of the best performing stocks in the last few years: Shares quadrupled in 2024 and are up nearly 50-fold from late 2022. On Thursday, Hindenburg Research, the short seller that has previously targeted the Adani Group and Roblox, took aim at the high flyer, alleging that Carvana’s spectacular turnaround is “a mirage” and that its leaders – the father-son duo of Ernest Garcia II and Ernest Garcia III – are running an “accounting grift for the ages.” Carvana’s stock closed down about 2% Thursday, while the major stock indices inched down by less than 0.4%.
Few Carvana watchers will be surprised by Hindenburg’s claims, which include allegations of “related-party accounting games” involving DriveTime Automotive, a chain of used car dealerships owned by father, Garcia II. For years, Carvana and the Garcias have been targeted by skeptics, short sellers and investor lawsuits over corporate governance and financial accounting concerns, which the firm has repeatedly denied and fought in court.
Hindenburg however presents a novel finding: that Carvana is hiding dealings with Cerberus Capital Management, a $60 billion (assets) private equity firm. The allegations center around $800 million of auto loan receivables that Carvana sold in the second and third quarters of last year, stepping in for the company’s primary loan purchaser, Detroit’s Ally Financial (formerly known as GMAC), which has scaled back its purchases. Carvana stated in filings with the Securities and Exchange Commission that the buyer of these loans was “an unrelated third party.” Hindenburg however contends that this third party is Towd Point Auto Trust, an entity that appears to be controlled by Cerberus. Carvana should disclose its transactions with Cerberus, Hindenburg claims, given that Dan Quayle – the former U.S. Vice President under George H.W. Bush, who joined Carvana’s board after its 2017 public offering – is also a senior executive at Cerberus.
“Carvana director Dan Quayle is Cerberus’ chairman of global investments, indicating the new buyer is an undisclosed related party, contrary to Carvana’s claims,” Hindenburg stated. “Since the trusts appear to be controlled by or affiliated with Cerberus, we believe the company should provide more transparency around these deals, and explicitly mention whether these are the unnamed buyers referenced in filings.”
A Carvana spokesperson told Hindenburg that the mystery loan buyer in question “is not a related party”, but refused to identify the buyer. “In the 7 years since our IPO, Carvana has been one of the most heavily researched public companies,” said a spokesperson for Carvana. “The arguments in today’s report are intentionally misleading and inaccurate and have already been made numerous times by other short sellers seeking to benefit from a decline in our stock price. We plan to stay focused on executing our plan for another great year in 2025.”
The alleged Cerberus-Carvana dealings cast a light on the political influence of Stephen Feinberg, the founder and controlling shareholder of Cerberus. Feinberg, who is worth an estimated $5 billion, led the intelligence advisory board during Donald Trump’s first term, and has been tapped by Trump to serve as Deputy Defense Secretary in his second administration. Carvana has been under investigation by the U.S. Securities and Exchange Commission since at least March 2020, when it disclosed the investigation in a public filing.
A spokesperson for Cerberus declined to comment. Former vice president Quayle did not respond to a request for comment.
Carvana is no stranger to controversy. Garcia II, 67, the company’s controlling shareholder, pled guilty to one bank felony charge in 1990 in connection to the Lincoln Savings & Loan collapse before founding DriveTime Automotive, a chain of used car dealerships that incubated Carvana in 2010, before Garcia III spun off the company in 2012. (The elder Garcia retains his controlling stake through a dual class share structure). In recent years, Carvana and the Garcias have faced lawsuits in federal and Delaware court from parties including pension funds, car dealerships and investors, whose allegations have ranged from illegally issuing temporary vehicle license tags and violating car dealership laws, to making misleading statements in financial filings, to selling stock to the Garcias at a “below fair value” price. Carvana has contested all of these legal actions and denied all claims of wrongdoing. Garcia II meanwhile has sold $5 billion worth of Carvana stock since 2020.
Despite its history of disputes, Carvana may be off the hook when it comes to disclosing dealings with Cerberus. “I do not think it is legally considered a related party transaction,” said Dan Taylor, a professor of finance and accounting at the Wharton School, in an email to Forbes. “RPTs are usually thought of as transactions between a firm and its own managers, directors, principal owners or affiliates.”
More salient for investors is what the alleged Cerberus partnership says about Carvana’s underlying business. Being able to sell the auto loans it originates –many of them subprime–is Carvana’s life blood. Carvana generates most of its income by selling its auto loans to third-party buyers in asset-backed securities.
Its largest buyer, Ally Financial, has been buying Carvana’s consumer loans for over a decade, including $3.6 billion in 2023, or 60% of all Carvana loan originations that year. Publicly disclosed data however show that Ally is on track to buy just 35% of Carvana’s loan book in 2024, a marked decrease. Ally reported in September that “credit challenges have intensified” in its retail auto loan book, while one unnamed Ally executive told Hindenburg, “We’ve pulled back from them [Carvana] pretty significantly in 2024.” Ally did not respond to a request for comment.
Meanwhile, 44% of loans for cars purchased since 2022 are underwater, per a recent survey from CarEdge. And according to S&P data cited by Hindenburg, Carvana’s subprime loans had the highest increase in borrower “extensions” of any subprime auto issuer. Hindenburg’s report goes as far as to compare the situation at Carvana, and its lax loan underwriting standards, to the housing bubble that formed prior to the Financial Crisis in 2008. One former Carvana director told Hindenburg: “I don’t think the model is much different than what we saw with kind of the early 2000 mortgage-backed securities.”
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