Carvana Faces Allegations of Fraudulent Accounting Practices

PHOENIX, Ariz. — Carvana, the online used car retailer known for its towering car vending machines, is under scrutiny following a damning report by short-seller Hindenburg Research. The report, released Jan. 14, 2025, alleges that Carvana has engaged in unethical accounting practices, lax underwriting standards, and questionable partnerships to inflate its financial performance.

The report claims Carvana has been hiding key performance metrics, recognizing unwarranted revenue, and selling auto loans to undisclosed buyers. Additionally, it alleges the company has been offloading unsold vehicles to DriveTime, an auto warranty provider owned by Carvana CEO Ernie Garcia III’s father, Ernie Garcia II. The relationship between the two companies has raised concerns about potential conflicts of interest and financial impropriety.

“As a related party, we’re able to kind of have an agreement that is favorable to pull as much of that profit forward,” a former Carvana director told Hindenburg. The report also highlights that Carvana was originally a spinoff from DriveTime, and its involvement in Carvana’s operations has been kept quiet. “[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,” another former employee said.

Legal action has already been initiated by two pension funds, alleging “sham deals” between Carvana and DriveTime. The report further claims that Carvana’s business model relies heavily on subprime auto loans, with former employees stating the company has maintained a near 100% loan approval rate. Approximately 26% of Carvana’s gross profit comes from selling these loans to third parties, including an undisclosed buyer that Hindenburg suggests could be Cerberus Capital, where Carvana director Dan Quayle serves as chair of global investments.

Carvana has also issued over $15.4 billion in asset-backed securities while retaining partial stakes in these assets, allowing it to claim ownership of some cash flows. However, the company’s underwriting standards have been criticized, with 60-day delinquencies among its “prime” borrowers reportedly four times the industry norm. Hindenburg researchers describe these loans as “toxic.”

The report also questions Carvana’s accounting practices, alleging the company shifted $390 million in selling costs into selling, general, and administrative expenses (SG&A), inflating its retail gross profit per unit by 34.5%. Former employees revealed that Carvana lowered reconditioning standards for an “economy line” segment, a decision never disclosed to investors.

In May 2023, Carvana reported a 41% year-over-year drop in loan sales, resulting in negative adjusted EBITDA. CEO Ernie Garcia III blamed market uncertainties, but just two days later, the company announced its best quarter in history, coinciding with Garcia’s $126 million stock purchase. The timing of these events has raised eyebrows among analysts.

Carvana’s audit committee has also come under fire, with two members having personal ties to Garcia II. Greg Sullivan, a former DriveTime board member, was suspended by the New York Stock Exchange in connection to a 1990 bank fraud scandal involving Garcia II. Ira Platt, Carvana’s audit committee chairman, was DriveTime’s longtime banker and Garcia II’s business partner. These relationships have cast doubt on the integrity of Carvana’s financial oversight.

Carvana has denied the allegations, calling them “intentionally misleading and inaccurate.” However, the report has already impacted the company’s stock, which has seen significant volatility in recent months. As of Jan. 15, 2025, Carvana’s stock price stands at $214.04, down 9.66% from the previous day.