A $63M Loss: The Critical Role of Due Diligence & Background Checks in Business Partnerships
July 31, 2023
They say it’s better to be proactive rather than reactive, and unfortunately, this is often a lesson businesses learn too late when it comes to performing due diligence on the companies they choose to work with. Today, we’re going to share a recent example of this when we tell you about two investment deals (worth $63 million) put together by CrowdStreet Inc. that have now vanished.
We will use this example to highlight the critical role of due diligence and background checks. Ignoring these essential practices can expose businesses to potential harm and undermine their overall success.
For their part, CrowdStreet does say they employ rigorous background checks and due diligence—but considering the events that transpired, it’s clear these efforts weren’t enough.
To prevent situations like this from happening to you or your business, conducting thorough research before engaging with any company is fundamental. This is a vital—but often overlooked—aspect of responsible and prudent business conduct. We’ll get into this and much more in today’s article.
By illustrating real-life examples of businesses facing legal, financial, and reputational damage due (in part) to inadequate research, we can underscore the significance of informed decision-making in today’s complex business landscape.
In this case, we’ll talk about Nightingale Properties and how the CEO, Elie Schwartz, allegedly misused $63 million of the funds raised by CrowdStreet Inc.
Before this, Elie Schwartz was named as a defendant in a 2021 lawsuit filed by Nakash Bellevue LLC. New York County Supreme Court Case – 655309/2021.
In the complaint filed on 09/02/2021, Nakash Bellevue LCC claims the defendant failed to pay back a $6,000,000 loan pursuant to a valid promissory note. Nakash Bellevue indicates the defendant is in default of the loan and that at the time of the filing of the lawsuit, the defendant owed an outstanding $4,981,500.01.
Unfortunately, this is just one of several claims and legal claims brought against Elie Schwartz and Nightingale Properties.
CrowdStreet is a real estate investment platform that utilizes crowdsourced funds to finance projects and deals. Nightingale Properties was one such company with which CrowdStreet had two deals worth more than $63 million.
The fiduciary overseeing the investments eventually revealed these deals failed to materialize—the funds raised were allegedly misused by entities connected to Nightingale’s CEO.
Crowdstreet has released a statement about the events, saying: “Elie Schwartz and Nightingale have demonstrated a blatant disregard for legal, ethical, and moral standards” while also violating their operating agreements with investors.”
However, CrowdStreet is also under fire, with investors asking questions about why they would release investor money before deals closed.
As this article from The Real Deal explains: “Instead of sitting in escrow, investors’ money went to separate accounts controlled by Nightingale. Schwartz and Nightingale were held to an operating agreement mandating the funds would only be used for the two projects, according to CrowdStreet.”
So, not only could CrowdStreet have done more effective due diligence before working with Nightingale Properties, but so too could have the investors who gave their money to the real estate crowdfunding platform.
For example, if Business Screen had been hired to conduct a check on Nightingale Properties and Elie Schwartz, red flags would have alerted the client of a previous civil litigation against the CEO and the negative news article referencing one of the companies’ managed properties.
It’s worth noting that these due diligence red flags wouldn’t have predicted the $63 million fraud incident currently taking place, but it could have raised some questions about what was occurring at their firm before the news of this incident came out.
All of this brings us to our next point: performing due diligence, including getting a business credit report, is paramount not only when investing in real estate but before working with any business.
By doing due diligence, investors can gain an understanding of a company’s financial history and track record to help them make informed decisions about their next moves.
This also applies to businesses looking for partnerships or investments from other companies—be confident a partner is legitimate and trustworthy with robust investor screening before entering into any financial agreements.
Here’s an article about a similar story you don’t want to miss next: Learnings from JP Morgan Chase’s $175MM Business Due Diligence Mistake.
Ultimately, due diligence can be one of the most powerful ways to protect yourself from fraudulent or irresponsible business practices.
It comes with all kinds of benefits, including:
1. Risk mitigation
Conducting due diligence and background checks help identify potential risks associated with a company, such as:
Understanding these risks allows businesses to make informed decisions and avoid partnering with unreliable or harmful entities.
In the case of Nightingale Properties, for example, someone who does their due diligence ahead of time would see the various allegations against its CEO, which might sway whether they choose to work with Nightingale or not, knowing what they know.
2. Financial security
By verifying a company’s financial status, including its credit history and payment behavior, businesses safeguard themselves from entering into agreements with financially unstable partners. This can help make sure payment obligations will be fulfilled, reducing the risk of financial losses.
Learn how to request a business credit check here.
3. Legal compliance
A company’s legal compliance status, as outlined in the Corporate Transparency Act, can tell you a lot about its ethos and practices, as well as any potential liabilities businesses may be exposed to.
As we explain here, a thorough background check should include:
In this case, a quick Google search would reveal the negative news reports about Nightingale Properties and its CEO, similar to what you can find when learning how to check if a business is legit.
4. Reputation preservation
It’s no surprise that partnerships with controversial companies can lead to damage to your reputation, and ultimately lost customers.
By doing a thorough background check, businesses know they are aligning themselves with reputable organizations that share similar values and ethical standards.
5. Contractual obligations
Partnering with a company comes with certain contractual obligations. It’s important to understand these obligations upfront to ensure they aren’t violated in the future.
For example, if a business is partnering with a vendor that requires certain service levels or payment terms, verify that both parties can meet those expectations. Failing to do so could lead to financial losses and legal disputes down the road.
6. Industry compliance
In addition to contractual obligations, businesses should also make sure they are adhering to industry-specific regulations. This includes following the applicable laws and regulations that govern their sector or geographic area.
7. Long-term success
Effective due diligence is an integral but often missed step in any business’s long-term success. Taking the time to properly research a company and its reputation before engaging with them helps ensure all parties involved are prepared for the risks associated with the partnership.
With services like vendor and partnership screening, businesses can avoid costly mistakes and preserve their positive track record.
At the end of the day, due diligence is a key factor in protecting your business from potential risks and helping you achieve long-term success.
A business credit report and other due diligence services from Business Screen could be the key to helping businesses navigate potential risks and make sure they are meeting all of their legal obligations.
With the right resources in place, businesses can confidently move forward with new partnerships and business opportunities—saving them the trouble and grief those affected from the Nightingale Properties fallout are experiencing.
Contact Business Screen today to find out how our comprehensive due diligence and background checks could mean the difference between success and failure for your business.
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