The Securities and Exchange Commission (SEC) has charged real estate investment platform Outlier Realty Capital with misleading investors about the use of funds. The SEC reports that a settlement is in the works, as defendants have agreed to pay a total of $3.3 million to move on.
Outlier was managed by Peter Stuart. The SEC reports that he collectively operated 27 real estate companies.
Stuart allegedly raised $34.4 million from around 100 investors for real estate projects in the Washington, DC, area. The SEC claims that investors were told the funds would be used for specific projects, but in fact, over $50 million of property-specific funds were comingled and used to cover company expenses.
The SEC’s complaint depicts a struggling operation that was losing money, accepting investor funds for one project and then using them to cover the expenses of another. The complaint states:
“Beginning no later than 2017, certain Defendants experienced severe and persistent liquidity problems due to insufficient capital and ballooning expenses for hiring, office expansions, consulting, and travel. The fees that the Manager LLCs and Class A Member LLCs earned were insufficient and/or not earned in time to pay general corporate expenses when they were due.”
Apparently, in 2019, Stuart was confronted by an employee regarding the comingling of funds, only to ignore the warning with the employee emailing Stuart explaining their decision to resign from the firm due to the “misappropriation of client funds…”.
Outlier eventually sold some properties to cover costs but allegedly shorted investors by $1.47 million.
Stuart and thirteen corporate defendants have agreed to be liable for the disgorgement of gains of $1,471,440 plus $159,936 in prejudgment interest. The same thirteen corporate defendants have also agreed to be liable for a $1,471,440 civil penalty.
Stuart has apparently agreed to pay a $240,464 civil penalty, to a five-year bar from serving as an officer or director of a public company, and to a five-year injunction prohibiting him from participating in the issuance, purchase, offer, or sale of any security, except for his own account.
The settlement is subject to court approval.