Nightingale Fraud Wipes Out $63 Million in Investor Money – Why Did CrowdStreet Raise So Much Money from Investors for a Scam?
CrowdStreet Has Some Serious Explaining to do to Investors in now-bankrupt Nightingale Properties
What Role Did CrowdStreet Play in Raising Funds for Nightingale Properties?
CrowdStreet, Inc. put together two investment deals to buy commercial real estate in Atlanta and Miami through developer Nightingale Properties and its CEO Elie Schwartz. The offering was contingent, and after raising over $60 million from about 800 investors nationwide, instead of the money sitting in escrow so that it could only be deployed for its legitimate real-estate investing purpose, the money was allegedly misappropriated by Schwartz to cover massive losses he sustained in various ill-fated real estate entities. According to an investor conference call held on Friday, September 15, apparently about $10 million of the funds Schwartz allegedly misappropriated were used to allegedly buy a huge position in First Republic Bank stock, along with options on the stock, in a horribly planned and disastrous effort by Schwartz to “make back” the money he had allegedly misappropriated. So, instead of the money deposited by investors with CrowdStreet and then sent to Nightingale for investment in the Atlanta and Miami properties, it appears as if the money was funneled by Schwartz to other entities in his control, and lost in stock and options trading.
CrowdStreet connected investors to this deal; that’s what CrowdStreet does. It openly promotes on its website, “Build Something Real – An easier way to build a real estate portfolio, no land lording required.” CrowdStreet promotes “A simple platform for Seamless Investing.” CrowdStreet is not shy about its alleged track record either, stating that it has funded “over 777 deals” with “$4.16 billion invested.” Of particular relevance to the Nightingale fiasco is the following information CrowdStreet posts on its website:
Our investments team is on the ground in many regions of the U.S., looking for experienced sponsors and their deals. Our team understands that investors have their individual goals, strategies and preferences when it comes to where they put their money. That’s why we work to bring a variety of investment opportunities to the CrowdStreet Marketplace. We like to describe the offerings on our Marketplace as curated because our teams carefully and diligently gather, review, and present deals that investors otherwise may not know about or have access to. Our Marketplace affords investors the opportunity to build a real estate portfolio that works for them. Roughly 5% of deals that we review ultimately end up on our Marketplace. Put another way, out of every 100 deals, about five make it onto the platform.
Our deal review process consists of three main steps:
- Sponsor Screening
- Deal Review
- Document Review
To be sure, Nightingale investment opportunities ended up on CrowdStreet’s “Marketplace” and hundreds of investors have lost about $60 million.
What did CrowdStreet Do Wrong?
One of the most fundamental steps taken by any private placement underwriter, placement agent, selling broker/dealer – or even an online portal connecting investors, is to ensure the security of the funds being invested. There are several critical controls that must be established by the issuer, reviewed by the selling broker or placement agent, and verified as consistent. Based on the representations on its website that CrowdStreet so thoroughly vets the investments it offers, that only 5% of them pass their due diligence test, and based on regulatory obligations of any broker/dealer or placement agent when marketing and posting real estate private placements.
When vetting a private commercial real estate offering like those involving Nightingale, beyond the bare bones of property evaluation, which is also critical, the financial basics have got to be fully evaluated. The depository accounts for which the investors’ money is to be placed, must be a legal escrow account, maintained by a third-party, unaffiliated custodian or trust company. Under no circumstances should the issuer like Nightingale be capable of withdrawing funds for any purpose other than directly investing in the intended real estate. It seems obvious, but these financial controls should absolutely not allow – under any circumstances – the issuer to access investor funds before the underlying real estate transactions close. It is unthinkable that these CrowdStreet/Nightingale offerings lacked such basic financial security in order to protect investors from fraud on this scale. But that appears to be exactly what CrowdStreet facilitated. So much for CrowdStreet’s “careful and diligent review” of the financials for the Atlanta and Miami deals.
CrowdStreet should have demanded that any deal with Nightingale include common sense financial controls that would never allow Schwartz or anyone else at Nightingale to access investor funds for any reason other than for purchasing the Atlanta and Miami properties intended for investment. Under no circumstances – ever – should a syndicate, issuer, or owner be able to access investor funds before a deal even closes. Those funds should have been placed in escrow, and if the deals didn’t close, they should have been returned to the investors. No questions asked!
What Should Nightingale/CrowdStreet Investors Do Now?
Nightingale/CrowdStreet investors are in a tough spot. They are being advised by an alleged “fiduciary” who was appointed (and indirectly paid) by CrowdStreet to advise them in the bankruptcy proceedings involving the underlying real estate LLCs in Delaware. According to a conference call on Friday, September 15, a purported “settlement” is being negotiated with Schwartz, which will certainly leave huge hole. If Schwartz had the money from legitimate sources to pay these investors off in settlement, he wouldn’t have allegedly stolen investor funds and bet $12 million of it on First Republic Bank stock and options. Legitimate businessmen do not act this way.
Investors need to be extremely careful and make sure any deals with Schwartz or CrowdStreet itself have no impact on their potential claims against CrowdStreet, which would like nothing more than to insulate itself from liability through a bar order in the bankruptcy or a release of claims from unsuspecting investors. Given that millions of investor dollars missing, the investors’ claims against CrowdStreet may be the most valuable assets the investors have in this mess.
If you invested in either of the Nightingale deals through CrowdStreet, please call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation free consultation with a securities attorney. Stoltmann Law Offices is a contingency fee firm offering representation to defrauded investors across the country, which means we do not get paid until you do.