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Nightingale CEO Put $12M Of CrowdStreet Investor Cash Into First Republic Stocks, Options Weeks Before It Failed

Nightingale Properties CEO Elie Schwartz took more than $10M of the cash he raised on CrowdStreet that he told investors would be used to buy a massive Atlanta office complex and instead bet it on the recovery of First Republic Bank before it failed.

A First Republic Bank location in northern Manhattan

On March 23, Schwartz diverted $12M in crowdsourced investor funds that were to be used to buy the Atlanta Financial Center and instead purchased $6M in First Republic stock and another $6M in First Republic options, Eric Lee, the chief restructuring officer for the entities Schwartz created to raise the funds, told CrowdStreet investors during a webinar Friday.

The trades came on the heels of the collapses of Silicon Valley Bank and Signature Bank and as analysts were circling First Republic as another at-risk bank. First Republic shares had lost more than half their value in the two weeks before Schwartz bought the stock.

On May 1, the Federal Deposit Insurance Corp. seized First Republic after a run on deposits and promptly sold it to JPMorgan Chase, wiping out shareholders in the bank.

“Those shares and options became almost worthless,” Lee said on the webinar. “That money is gone, unfortunately.”

That Schwartz personally gambled on First Republic with investor funds was the most shocking revelation disclosed on Friday in the ongoing fiasco of the CrowdStreet missing millions, but it wasn't the only new information investors learned on the webinar, hosted by Anna Phillips, the independent manager appointed to take over the two entities Nightingale created to raise cash on the platform.

On the webinar, Lee, a forensic accountant and financial fraud expert, told investors Schwartz used $5.5M of the more than $50M in misappropriated funds on personal and business expenses, including on credit card payments and watches.

Schwartz took $23M of CrowdStreet investor funds to pay dozens of separate third parties, Lee told the investors. Those payments range from small amounts to a $9.4M transaction. The entities weren't identified on the call, and Lee said it was unknown how much of these funds could be clawed back, especially given the expense of litigation.

“You don’t want to spend a lot of money in litigation to get these little funds,” he said.

CrowdStreet did not return messages seeking comment as of press time.

The saga began last year when Nightingale launched two crowdfunding campaigns on CrowdStreet, first raising $45M from retail investors to buy the 915K SF Atlanta Financial Center complex from Sumitomo Corporation of America for $182M, a price that would have represented a $78M loss.

Months later, Nightingale returned to the platform to raise equity to renovate a Miami Beach office building it already owned. It raised $8.8M toward that effort. More than 600 investors participated in the campaigns at a minimum commitment of $25K each, but neither deal closed.

In June, CrowdStreet told investors it couldn't account for where the funds were located — they had gone directly into LLCs controlled by Schwartz rather than being placed in escrow — and accused Nightingale of misappropriating the funds. Phillips was appointed as an independent manager to take control of the LLCs and pushed both entities into bankruptcy with the intent of recovering as much of the missing millions as possible.

Nightingale has run into trouble at several of its other investments. Before the Atlanta Financial Center campaign, it bought 200 West Jackson St., a Chicago office building, for $130M, funded in part by $25M of equity from CrowdStreet investors. CrowdStreet is also seeking to have Phillips take over that property, telling investors in July that the company was "concerned that Nightingale may have acted inappropriately in managing the 200 West Jackson property as well." 

The New York-based firm has a long track record of acquiring large office buildings, having made more than $10B in investments over the years. But across the country, its portfolio is struggling. It lost control of the largest office property in Philadelphia earlier this year, lost a Brooklyn office building to foreclosure and is battling foreclosure at multiple Manhattan buildings.

Nightingale's alleged fraud has rocked the real estate crowdfunding industry, prompting a handful of CrowdStreet's competitors to issue statements to their customers assuring them that their investments were safe while admitting that the decade-old industry had taken a reputational hit.

“Financial services and fraud are unfortunately a natural pairing, and given that our industry is still newer and on a growth curve, anything that could hurt the reputation could hurt its growth,” EquityMultiple CEO Charles Clinton told Bisnow last month.

Phillips said on the webinar that her team had reached a settlement with Nightingale on behalf of the two bankrupt entities. The advanced settlement talks were first disclosed earlier this month during a bankruptcy court status update.

“We have reached a settlement in principle with Mr. Schwartz and Nightingale,” she said. “There is a substantial transaction that hopefully will occur that will also benefit the investors. This could be a very good result for our investors."

Phillips didn't reveal details of the potential settlement Friday, except that it would be the basis of a plan for both entities to exit bankruptcy. Phillips said the investors could be told about the details of the settlement as soon as Thursday. The deal would still be subject to an investor vote and court approval.

Phillips also told investors that she continues to cooperate with the Department of Justice and the Securities and Exchange Commission, as Bisnow previously reported. She added the FBI to the list of agencies she said were investigating Schwartz and Nightingale but said those conversations were independent of her pursuit of a settlement. 

“My job is getting your money back, not putting this guy in jail,” she told investors. 

UPDATE, SEPT. 15, 6:10 P.M. ET: This story has been updated to include more background on Nightingale Properties and more information from the webinar.