Ernie Garcia II has made a lot of money from used-car sales. Garcia’s son, Ernie Garcia III, started the online car company Carvana Co. in 2012. He capitalized on his father’s used-car business and shifted the model to an online setup.
For used-car buyers, Carvana features easy online browsing for used cars, offers free home delivery (or the option to pick up your vehicle at a Carvana “vending” machine), and gives buyers a 7-day trial period with the vehicle with no obligation.
Who is Ernie Garcia II?
Garcia II has been in the used vehicle business for many years. He's the father of Carvana founder and CEO Ernie Garcia III. Although the elder Garcia doesn't have a formal role at Carvana, he owns a significant enough portion to profit handsomely off its performance in the market.
The way Carvana is structured might seem somewhat questionable. Daniel Taylor, the head of the Wharton School’s Forensic Analytics Lab, said, “The existing structure has allowed them to run this $60 billion public company as if it’s a family firm and for the family’s benefit,” according to The Wall Street Journal.
Investors in Carvana can even find warnings about its structure in financial filings. The CEO and his father might “try to boost their profits at a risk to shareholders.”
Carvana's financial structure
The elder Garcia took advantage of the COVID-19 pandemic and bought shares at a below-market price after a drop in value. Within two months, the share value doubled.
In the fall of 2020, Garcia II started aggressively selling shares of the company. He started with one that netted him $388 million, according to filings. In November 2020, he used a 10b5-1 plan to start selling 30,000 shares a day. He frequently modified the plan, which can cause regulatory concern as it gives the appearance of acting on insider information.
Garcia II has sold over $3.6 billion in Carvana stock since October 2020.
According to SEC Chairman Gary Gensler, the agency might revise rules soon that govern 10b5-1 plans, which could limit cancellations and modifications.
Carvana was designed with a dual-share structure, which gives each share held by either of the Garcias a value of 10x the voting power of shares held by retail investors. The Wall Street Journal reported that even though they have sold billions of dollars worth of stock, they still control 85 percent of the company’s voting shares worth over $23 billion.
A tax receivable agreement also is in place for Carvana, which can disproportionately benefit early investors and founders over public shareholders.
Ernie Garcia II’s fraud history
The elder Garcia had serious legal problems decades ago. He played a role in a real estate scandal involving Charles Keating and his Lincoln Savings and Loan Association. Garcia II pleaded guilty in 1990 to one count of bank fraud and served a three-year probation sentence.
Gracia II stated in 2013 in a securities filing that he had pleaded guilty in that case due to financial pressure and the chance to only receive a $50 fine in exchange for his cooperation, according to The Wall Street Journal.
Carvana's founder and CEO
Carvana, the online marketplace for vehicle sales, was founded in 2012 by Garcia III. Before starting Carvana, Garcia III worked for his father’s company, DriveTime Automotive Group from 2007 to 2013. Carvana was born as a spin-off of DriveTime that focused on online car sales.