Nightingale’s Elie Schwartz used $12M of investor funds to buy First Republic stocks, options

Nightingale CEO Elie Schwartz allegedly gambled with investor money and lost.

Schwartz, the man behind the troubled real estate investment firm, diverted $12 million in crowdsourced investor funds in March for purposes other than their intended use.

The funds were originally meant to acquire the Atlanta Financial Center but were instead used to purchase $6 million in First Republic stock and another $6 million in First Republic options, according to Eric Lee, the chief restructuring officer for the entities created by Schwartz to raise these funds, BisNow reported.

The move came during a tumultuous time in the financial sector, with the collapses of Silicon Valley Bank and Signature Bank fresh in the minds of investors. 

First Republic, the bank in which Schwartz invested, was also under scrutiny as analysts raised concerns about its stability, causing its shares to plummet by more than half in just two weeks prior to Schwartz’s stock purchase.

The dire consequences of Schwartz’s gamble on First Republic became evident when, on May 1, the FDIC took control of First Republic due to a run on deposits and promptly sold it to JPMorgan Chase. That resulted in the complete wipeout of shareholders in the bank, rendering the shares and options Schwartz had purchased almost worthless.

During a webinar hosted by Anna Phillips, the independent manager appointed to oversee the entities created by Nightingale on the CrowdStreet platform, Lee disclosed further unsettling details. 

It was revealed that Schwartz had personally used $5.5 million of the misappropriated funds, which amounted to over $50 million, for personal and business expenses, including credit card payments and luxury watches.

Moreover, Schwartz directed $23 million of CrowdStreet investor funds to pay numerous third parties, ranging from minor transactions to a substantial $9.4 million payment. The identities of these entities were not disclosed during the webinar, and Lee expressed doubts about the feasibility of recovering these funds through litigation, given the potentially high legal expenses involved.

Thel saga began when Nightingale initiated two crowdfunding campaigns on CrowdStreet, raising $45 million from retail investors with the intention of purchasing the Atlanta Financial Center. However, neither deal went forward, and suspicions arose when the funds did not end up in escrow as intended. Instead, they were funneled directly into LLCs controlled by Schwartz.

Phillips was subsequently appointed to take control of the LLCs and subsequently pushed both entities into bankruptcy in an effort to recover the missing millions. Nightingale also faced troubles with other investments, including a Chicago office building and properties in Philadelphia, Brooklyn, and Manhattan.

The repercussions of Nightingale’s alleged fraud sent shockwaves through the real estate crowdfunding industry, prompting competitors to reassure their investors about the safety of their investments while acknowledging the hit to the industry’s reputation.

Phillips also announced during the webinar that her team had reached a settlement with Nightingale on behalf of the two bankrupt entities. While details of the settlement were not disclosed, Philips said it would form the basis for both entities to exit bankruptcy, pending investor approval and court consent.

Phillips also noted her ongoing cooperation with various regulatory bodies, including the Department of Justice, the Securities and Exchange Commission, and the FBI, in their investigations into Schwartz and Nightingale. However, she emphasized that her primary focus remains on recovering investors’ funds rather than pursuing criminal charges.

— Ted Glanzer