The CEO of online car retailer Carvana, Ernie Garcia III, has been hit with an insider trading lawsuit.
The lawsuit filed Thursday in Delaware Chancery Court claims Garcia, along with his father, Ernie Garcia II, and several other insiders, used fears surrounding the Covid-19 pandemic to buy shares at “bargain basement” prices, despite knowing that the company was financially stable. The Garcia family controls around 92% of the company through a variety of trusts and investment firms, according to the lawsuit.
The suit alleges that the Garcias and financier Mark Walter sold a large amount of stock at below-market prices to a select group of insiders. The Garcias allegedly knew that the company’s business model of selling cars online, with “touchless” delivery, would appeal to consumers during the pandemic, which would bump up stock prices.
The deal in question happened at the end of March, when Carvana raised $600 million through a registered direct offering. The company painted a dire image at the time and detailed a series of cost-cutting measures in a regulatory filing.
Then, earlier this month, Carvana offered up to 5 million new Class A shares for more than double what was paid during the insider sale.
The suit says Carvana had a strong balance sheet and little need for additional liquidity. The company has turned record profits year-on-year and kept business stable during the first quarter of 2020. In Q1, the car dealer posted $1.1 billion in income, a 45% year-on-year increase. At the time, Garcia told investors that, following a drop in business in late March, sales had continually improved week-on-week.
The company has also kept the financing rolling in — in March, we reported that Carvana had received a $2 billion lifeline from Ally Finance to keep its car loan business stable.
The suit also includes several unrelated self-dealing allegations involving other companies owned by the Garcias.
Carvana didn’t respond immediately to a request for comment from the AIM Group.
Bloomberg Law reported initially on the lawsuit. For more information, click here.