Plaintiffs question father-son relationship in Carvana stock inflation class action

PHOENIX (CN) — The United Association National Pension Fund is seeking further discovery in a class action accusing Carvana founder Ernie Garcia III of artificially inflating stock prices and profiting off his father’s $3.6 billion in insider sales.

Representing a still-unconfirmed number of injured investors, attorneys for the pension fund accuse Garcia III and Carvana of issuing false and misleading financial statements, artificially inflating stock prices, of which Garcia’s father, billionaire Ernest Garcia II, is the largest shareholder.

The bubble burst in May 2022. The company’s stock price fell 18%, and it laid off more than 2,500 workers in response. The stock continued to plummet into November 2022, when Carvana laid off another 1,500 employees.

As the April class certification deadline looms, plaintiff attorneys seek all communications to and from Garcia III concerning his knowledge of or benefit from his father’s sales in the class period, which is May 2020 to July 2022. They say the documents could be used as evidence Garcia III, a beneficiary of his father’s trust, had a motive to artificially inflate prices.

“This is about whether, during the class period that his father was selling stock at an artificially inflated price that he stands to inherit,” plaintiff attorney Tor Gronborg said in a Phoenix courtroom Thursday.

Kalana Kariyawasam, defending Carvana, said Garcia III couldn’t have had anything to gain because Garcia II made his sales individually, not through his trust. Kariyawasam said he had no objection to turning over more documents but added that thousands have already been shared, and none are relevant to the plaintiffs’ request.

“The answer to that is probably such emails don’t exist because there wasn’t a scheme,” he added.

Gronborg said whether the sales were made through a trust is irrelevant because Garcia III still stands to inherit money from his father in one way or another.

U.S. Magistrate Judge John Z. Boyle said he would like to see the trust itself to determine whether more discovery is necessary and will issue an order soon.

The plaintiffs also asked for documents related to two Securities Exchange Commission investigations from 2019 and 2025.

The 2019 investigation, which ended before the supposed scheme began in 2020, concerned Carvana’s disclosure of historical loan securitization practices.

Kariyawasam said those issues have nothing to do with the accused actions or the class period and should therefore be disregarded.

In 2025, Carvana received a subpoena from the SEC relating to a short seller report accusing it of accounting manipulation, lax underwriting and related-party transactions, including sham deals with DriveTime, of which Carvana is a subsidiary and Garcia II is the founder and owner.

The plaintiffs first requested the documents from the SEC itself, but the commission declined, citing policy on pending investigations. The plaintiffs then turned to Carvana, which argued that the SEC’s decision should be final.

“We aren’t in the business of interfering with the SEC investigation and deciding what parts are and aren’t public,” Kariyawasam told Boyle.

Gronborg said both investigations are relevant, clarifying that the plaintiffs in the complaint mention related-party transactions “leading up to and during the class period.”

Similarly, he said the 2025 investigation originating after the class period doesn’t make it irrelevant because it concerns the same related-party dealings mentioned in the complaint. He argued that the SEC’s refusal to release the documents doesn’t mean that Carvana can’t.

He added that because Carvana had to respond to the investigations, all related documents had already been gathered and shared once, meaning it would require no additional work to share them again.

“If in fact they were irrelevant, defendants would have given them to us,” Gronborg said.

Defending both requests, Kariyawasam said the documents would already have been shared if they exist. But the plaintiffs, for months, have taken Carvana back to Boyle, claiming the defendants are intentionally misusing online discovery tools to delay and prevent certain documents from coming out.

At the start of the hearing, Carvana attorney Matthew Peters said he and his team have failed to collect hyperlinks from more than 90% of the 112,889 internal emails identified by the plaintiffs.

“We were concerned that defendants might rig this process in a way that was set up to fail,” pension fund attorney Daniel Drosman told Boyle. He and other plaintiff attorneys have complained that the defense team has refused to use the proper search terms required to find specific documents.

To remedy the disagreement, Boyle said he will allow the plaintiffs to request batches of up to 250 specific emails at a time rather than give the defendant’s search parameters to come up with them on their own.

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