Carvana Lawsuits Reveal Fraudulent Loan Practices and SEC Probe

Carvana, known for its distinctive car vending machines and online sales model, has recently faced a barrage of lawsuits and investigations by the SEC, alleging fraud, insider trading, inflated revenue, and misleading investors. The company, which experienced rapid growth, a near collapse, and then a resurgence, including joining the S&P 500, is now under intense scrutiny.

The Core Accusations: A "Pump-and-Dump" Scheme

At the heart of the allegations is the claim that Carvana's business model was a "fraudulent pump-and-dump scheme" designed to enrich its primary stakeholders, CEO Ernest Garcia III and his father, Ernest Garcia II, a major shareholder.

Predatory Financing Practices

Carvana's growth was significantly fueled by its financing arm, which intentionally targeted customers with low credit scores. A former underwriter for Carvana revealed that a substantial portion of their customers (around 60%) had poor credit, leading to high-interest rates, often exceeding 15-20%, and sometimes reaching 28.6%. This meant a $15,000 car could end up costing $18,000-$20,000 due to interest.

Data supports this, showing that almost 44% of Carvana's loans in Asset-Backed Securities (ABS) deals were non-prime, with over 80% of recent non-prime ABS deals having "deep subprime" FICO scores, indicating the riskiest borrowers. This practice was exacerbated by Carvana's reputation for delivering faulty vehicles to these vulnerable customers.

The Loan Selling Business Model

Carvana's true "cash engine" wasn't just selling cars but selling the high-interest loans associated with them. During the pandemic, low interest rates and increased car prices created a perfect storm for Carvana. They attracted customers with bad credit, generating valuable high-interest loans. These loans were then bundled and sold to third parties. While this practice is common in the used car industry, the issue lies in who Carvana was selling these loans to and the transparency surrounding these transactions.

The Crash and Lawsuits

The pandemic-driven boom was short-lived. Carvana's stock plummeted from $337 in July 2021 to $4.7 in December 2022, a 98% drop. This was due to declining used car prices as the world reopened and rising financing costs. Carvana had accumulated significant inventory at high prices and taken on substantial debt through acquisitions despite not being profitable, leading to an overvalued stock.

In 2022, multiple law firms filed lawsuits against Carvana on behalf of investors, accusing the company of presenting itself as an "Amazon of the used car industry" with limitless growth, while in reality, it was a "lemon" built on a fraudulent pump-and-dump scheme. Carvana's attempts to dismiss these lawsuits in 2024 and 2025 were denied.

Misleading Investors and Hiding Costs

The alleged pump-and-dump scheme involved several components, primarily withholding critical information from investors regarding the company's risks and the true profitability of each car sold.

• Inflated Retail GPU (Gross Profit Per Unit): Carvana reported positive Retail GPU in earnings calls, assuring investors of profitable retail vehicle sales. However, they allegedly excluded significant per-vehicle operational expenses (such as material costs, shipping, title, and registration) from their Retail GPU calculations, thereby misrepresenting the actual profitability.
• Title and Registration Issues: Carvana faced a separate scandal for failing to register sold cars, leaving customers with temporary license plates for extended periods. This was also part of the larger lawsuit.
• Hidden Metrics: Carvana stopped disclosing metrics like "average days to sale," claiming stability, despite the volatile car price fluctuations during the pandemic. This further obscured the true financial health of the company from shareholders.
• Pumping Sales: The company allegedly boosted sales by violating title and registration laws and selling to customers in distant locations, which made car sales even less profitable.

The Garcia Family's Role

Ernest Garcia II, a federal felon for bank fraud, is prohibited from being employed by or running any company listed on the NYSE, which Carvana is. To circumvent this, he allegedly installed his son, Ernest Garcia III, as CEO and Chairman, while maintaining over 80% of the voting power and appointing loyal associates to the board.

Between 2020 and 2021, during Carvana's peak growth, both Ernest Garcia II and III sold approximately $3.6 billion worth of Carvana stock. Accounting professor Daniel Taylor suggested that the Garcias were aware the company's inflated success was temporary.

Hindenburg Research's Expose

In January 2025, Hindenburg Research published a detailed report titled "Carvana: A Father-Son Accounting Grift For The Ages," uncovering further alleged irregularities:

• Related-Party Loan Sales: In nine months of 2024, Carvana sold $6.15 billion in loans, generating $541 million, which was 2.2 times its net income for the period. Notably, $800 million of these loans were sold to an "unrelated third party" highly suspected to be Cerberus, whose chairman, Dan Quayle, is a Carvana director. This connection, if true, would mean the party was not "unrelated" and should have been disclosed under SEC rules. Hindenburg described this as "passing around risky loans like a hot potato."
• Wholesale Sales to DriveTime: Over three fiscal years, Carvana generated $105 million in revenue from selling cars wholesale to DriveTime, another used car dealership and finance company run by Ernest Garcia II. Carvana was originally a DriveTime subsidiary before being spun off. Former Carvana leaders confirmed that warranty reimbursements from DriveTime were "pretty generous" to Carvana, artificially boosting revenue for public investors. This related-party transaction was reportedly a "lever that's not talked about."

Resurgence and Continued Scrutiny

After its stock crash, Carvana saw a resurgence. In July 2023, Garcia III bought back $126 million in shares, and the next day, Carvana announced its "best quarter in company history." Subsequently, Ernest Garcia II sold an additional $1.4 billion in Carvana stock as the price climbed again.

In June 2025, the SEC issued a formal subpoena to Carvana, compelling the company to provide documents related to Hindenburg's claims, indicating a formal investigation is underway.

Document Production Issues in Lawsuits

In the ongoing shareholder lawsuits, plaintiffs are attempting to obtain 112,889 emails from Carvana. However, Carvana failed to provide 90% of these, leading to accusations that the company was intentionally unhelpful and using search terms to bury incriminating documents. A judge intervened, allowing plaintiffs to request up to 250 specific emails at a time to prevent Carvana from hiding information.

Carvana's operations, from its unique vending machine to its complex financial dealings, present a compelling and controversial narrative, raising serious questions about its business practices and transparency.