DOJ, SEC Investigating Nightingale After $40M Of Investor Cash Allegedly Diverted To CEO's Accounts

The Department of Justice is investigating Nightingale Properties after the New York-based real estate investor allegedly diverted nearly $40M of equity raised on real estate crowdfunding platform CrowdStreet into accounts controlled by its CEO.

Nightingale raised the money to acquire a huge office complex in Atlanta and renovate an office building in Miami Beach, but it never closed on the deals. The revelation that federal law enforcement agencies were investigating Nightingale came Friday afternoon during an update to investors given by Anna Phillips, the fiduciary appointed to take over the entities created for the two deals.

"The Feds are absolutely engaged and focused, and we’re cooperating fully with them," Phillips told investors on a webinar Friday, a recording of which was obtained by Bisnow. "Based on the dialogue that we have had, the Securities and Exchange Commission and the Department of Justice are absolutely engaged on their end.”

The vast majority of the equity Nightingale raised on CrowdStreet — $54M for the 915K SF Atlanta Financial Center deal and $9M for the 140K SF Lincoln Place building in Miami Beach — was funneled to accounts controlled by Nightingale CEO Elie Schwartz, according to new court filings.

Nightingale raised the equity from individual investors who paid a minimum of $25K each. Until the new filing, a listing of assets and liabilities filed with Delaware Bankruptcy Court, it was unclear where the vast majority of that funding had gone. 

Companies affiliated with Schwartz received more than $45M from the entities Nightingale set up to take in investment from the CrowdStreet platform between the two deals, according to the filing.

In a series of transfers, One Night Holdings, an entity controlled by Schwartz, received $26.45M from the Atlanta entity, ONH AFC CS Investors LLC, and Schwartz himself siphoned off $19.2M, according to court records. 

On Friday's webinar, Phillips said about $37M was paid to Schwartz personally or to his controlling entities out of the Atlanta account, while $1.3M was paid out of the Miami Beach account. She said $11M was paid to third parties out of the Atlanta account, and $3M went to third parties from the Miami Beach account.

Bisnow previously reported that Nightingale paid $3M — the biggest sum to any outside party — from the Miami Beach entity to Atlanta-based Trimont Real Estate Advisors. A Trimont spokesperson declined to comment.

Last month, Phillips told investors that only $125K remained in the Atlanta Financial Center account, while just $1,500 was in the account for Lincoln Place. Phillips placed both entities into Chapter 11 bankruptcy on July 14.

“The money that went to Mr. Schwartz personally or his related entities were largely due to the personal expenses of Mr. Schwartz and his personal investing activities and business expenses of Nightingale and its affiliates,” Phillips said on Friday's webinar.

Phillips told investors that her team received a proposed settlement offer from Schwartz through his lawyers, which she saw as “not acceptable because the terms are not fair, and it’s also unactionable."

"We want to make sure that any offer that comes through predicated on future performance has sufficient and credible third-party documentation and disclosure," she said. 

“We still haven’t met with Mr. Schwartz personally or heard from him directly,” she added.

A spokesperson for Nightingale didn't immediately respond to a request for comment.

Nightingale has amassed a substantial commercial real estate portfolio up and down the East Coast. The company claims to have invested north of $10B and have owned and managed more than 22M SF of commercial properties. But nearly $1B of that investment is at risk in all corners of its property empire, including multiple large office buildings in Philadelphia and New York City.

The court documents also detail other payments Nightingale made using CrowdStreet investor funds, many of which were classified by the Chapter 11 restructuring officers as "reason unknown." One of those payments was a $210K transfer to Phillips Fine Watches. 

The payments include nearly $1M to a mezzanine entity tied to 200 West Jackson Blvd., the 480K SF office tower in Downtown Chicago for which Nightingale raised $25M on CrowdStreet and acquired last year. Phillips said Friday that exact amount was transferred back to the Atlanta Financial Center entity two days later.

“We don’t get the rationale of this transaction,” she said. 

Last month, CrowdStreet said it was looking to appoint Phillips as independent manager to take over the controlling entity of 200 West Jackson and audit its financial records over fears of another alleged fraud. 

"Nightingale’s actions and its lack of response regarding information and distributions with respect to 200 West Jackson has us concerned that Nightingale may have acted inappropriately in managing the 200 West Jackson property as well," CrowdStreet investor relations wrote in the July 20 message, which was obtained by Bisnow.

More than $10M from the ONH AFC account was diverted to entities called JOSMIC Holdings and JOSMIC 2, according to court documents, both of which are registered to a single-family home in Brooklyn. The property was the subject of some neighborhood controversy when locals accused the developer of building a large synagogue instead of a family house on the site. Schwartz is a Brooklyn native.

Other payments made from the ONH AFC account for unknown reasons include $5M to Riverside Abstract, a national title agency, more than $3M in unidentified ACH transfers and over $100K to Studios Architecture.

Representatives from Riverside and Studios didn't immediately respond to requests for comment.

Court documents show Nightingale refunded the equity investments of a handful of the more than 600 individual investors in the Atlanta Financial Center deal a total of more than $7.6M — $675K of which went directly to Schwartz's personal account.

The fallout from Nightingale’s actions has ensnared CrowdStreet and its leaders. CrowdStreet co-founder Tore Steen was ousted as CEO of the company late last month, replaced by former Blackrock real estate Chairman Jack Chandler, who joined the CrowdStreet Investment Committee as a voting member in 2020. Steen remains on the board of directors.

Some investors have expressed outrage over the fact that CrowdStreet didn't place their funds into an escrow account until Nightingale could close on its acquisitions, a step that could have prevented the misappropriations.

Phillips said she is in talks with CrowdStreet for a settlement in which the company would continue to fund litigation moving forward, assuming the settlement is agreed upon by a “minimum of the investors” in the entities. 

"CrowdStreet plans to continue to cooperate with Anna as she conducts her investigation," a CrowdStreet spokesperson said. "We don’t have further comment to share beyond what she outlined in the webinar."

Phillips cautioned investors about pursuing litigation against CrowdStreet on their own, saying that the agreement they signed to invest in AFC on the CrowdStreet platform requires them to go to individual arbitration under Texas law.