General
September 18, 2021
8 minutes read

Cashing Out: Carvana CEO’s Dad Sells $3.6B Of Stock

Carvana is an online American used-car retailer that’s grown fast and furiously since its founding barely nine years ago. For…

Carvana is an online American used-car retailer that’s grown fast and furiously since its founding barely nine years ago. For example, it now has a market cap of $57bn that’s 22x the market cap the company IPOed at in 2017.

Carvana’s wild stock growth has been driven by wild business growth, such that the company posted $5.6bn in sales in 2020 compared to $859mn in 2017 when it went public. For this growth, the company has wildly rewarded investors that put in money early and more so the founding family that controls it – father and son duo Ernest Garcia II and Ernest Garcia III.

As stocks enjoy great growth, it’s normal that executives and founders with big stakes in a company would want to sell some shares and get cash to diversify their holdings, but selling too much can raise eyebrows and this is the case of Ernest Garcia II, the father of Garcia III who’s the CEO of Carvana.

It turns out that Garcia II has sold Carvana shares to the tune of $3.6bn over the past year, raising eyebrows regarding his bulky share sell-off. He has long been Carvana’s biggest shareholder despite holding no formal role at the company, because Carvana was actually founded as a subsidiary under his brick-and-mortar used-car retailer, DriveTime, by his son.

Garcia II’s large selloff was first reported by The Wall Street Journal. It raises eyebrows for being quite excessive, representing 16% of his holdings sold in the span of a year;

For example, the only known company insiders that have sold a comparable amount of shares over the past year are Jeff Bezos of Amazon, Facebook’s Mark Zuckerberg, and Walmart’s Walton Family, and these are companies each valued at hundreds of billions compared to Carvana’s $57bn market cap.

Despite selling a large bulk of shares, Garcia II and his son will still maintain near-total control of Carvana due to an ownership structure that confers much more voting rights for shares owned by them than those owned by common investors. This has raised concerns over governance procedures, such as when both Garcias were accused of insider trading last year by some shareholders;

The insider trading suit stemmed from the Garcias buying blocks of Carvana shares at lower prices before certain announcements were made that drove the stock price up. The suit accused both of them of self-dealing without repercussions due to their near-total control of the company.

It wasn’t the first or second time Garcia II was accused of self-dealing on the public markets. In fact, when his used-car retailer formerly called Ugly Duckling was publicly-traded circa 2000 (it went private in 2002), he was sued six times by shareholders with accusations that he abused his position to profit from his company’s assets.

Also, Garcia II once pleaded guilty to bank fraud back in 1990, was convicted but didn’t serve any time.

Nonetheless, Garcia II’s large Carvana sell-off was made under a predetermined trading plan that he filed last year June. Such trading program known as a 10b5-1 plan lets company insiders plan share sales ahead of time to avoid the appearance of insider trading;

But, Garcia II modified his 10b5-1 plan two times over the past year whereas such frequent modification isn’t often heard of. In fact, such frequent modifications have become the target of recent SEC legislation seeking to curb it.

Though Carvana has been growing wildly, it’s posted significant losses over the past few years as it has spent heftily to drive its growth. The company only reported its first quarterly profit of $45mn in the 2nd quarter of this year;