(Bloomberg) — Hundreds of regular investors who pooled together $63 million to buy chunks of commercial real estate in Atlanta and Miami have allegedly seen their money disappear.
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Two deals orchestrated by CrowdStreet Inc. have collapsed. , a real estate investment company that raises sources of funds from relatively wealthy individuals, as investors’ money vanished from bank accounts earmarked for buying shares in buildings, according to bankruptcy court documents.
Court papers showed that an independent manager brought in to look into how the deals went wrong found millions of dollars in crowd-funded money ending up in accounts owned by Nightingale Properties, a company with which CrowdStreet partnered in the transactions, along with the CEO of Nightingale.
“When we became suspicious of potential financial misconduct, we alerted regulators and negotiated the appointment of an independent director,” a CrowdStreet representative said in an emailed statement Monday. “Financial fraud is a risk that we take very seriously, and we remain committed to providing investors with the best real estate investment experience online.”
New York-based Nightingale and CEO Eli Schwartz did not respond to requests for comment.
In order to investigate the accounts — and possibly recover the funds — the independent director put the two legal entities earmarked for the stock purchases in the Atlanta and Miami buildings into bankruptcy last Friday. Bankruptcy would allow companies to come up with a payment plan for creditors.
Schwartz’s attorney said he would cooperate with the investigation, according to court papers.
Withdrawn accounts
Nightingale raised funds from accredited investors through the online platform CrowdStreet. The money was then put into two shell companies, which Nightingale was supposed to use to buy real estate: a sprawling office complex in the upscale Buckhead neighborhood of Atlanta, and a mixed-use building in Miami Beach.
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The minimum investment from accredited investors was $25,000, according to a report provided by Eric Lee, Entities’ chief restructuring officer. But while investor interest in the Atlanta Financial Center complex exceeded expectations — it secured 238% more financing than it set as a target — financing for the Miami construction deal fell through.
After attracting more money from other investors and placing its own shares, Nightingale was supposed to facilitate the deals, according to court papers. In the meantime, the company was expected to leave CrowdStreet investors’ funds in two different entities – ONH AFC CS Investors and ONH 1601 CS Investors – intact.
Eventually, the deals fell through, encountered delays, and some investors asked for refunds. While some of those refunds have been made, many are still pending, according to Lee.
In June, Anna Phillips, newly appointed independent director of Entities, launched an internal investigation to track down the funds. I soon discovered that the entities’ bank accounts were depleted. According to court papers, only $125,000 and $1,600 were left in the accounts.
Court papers show that filing for bankruptcy would allow Phillips and Lee to investigate where the money ended up.
“Debtors will be greatly aided in this investigation by being able to use the powers of the bankruptcy law to investigate these prep activities,” Lee wrote in a bankruptcy filing on Friday.
(Corrects the description of fund flows in the third and eighth paragraphs).
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