Investors Allege 40% Gut-Punch Loss on Prodigy Network, Allege PN Misappropriated Investor Funds
Updated: Apr 2, 2020
Investors allege a 40% loss on 84 William Street deal (along with being asked to pony-up $9.3 million more to avoid a 100% loss). This, after other problematic deals and allegations that Prodigy misappropriated $2.5 million of investor money and is allegedly "broke"...
Caption: Prodigy Network CEO, Rodrigo Niño, (left) and Prodigy Network's ex-COO Vincent Mikolay (right) have each allegedly accused the other of misappropriating up to $2.5 million of investor money.
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Prodigy Network burst onto the scene several years ago in a huge way. It was the only platform to run full-page glossy ads in expensive magazines, including The Economist. Its attractive website was much easier to use than those of the rest of the field. Their polished presentation was extremely compelling and even included professional videos (which weren't common back then). Their deals were massive by crowdfunding standards (some over $100 million), and investors appeared to snatch them up enthusiastically and quickly. Prodigy Network appeared to be a well-funded, popular, major player.
A Fly in the Ointment
However, they also ignored my numerous requests for basic information about the platform. I personally found this lack of transparency unacceptable. So despite all of its apparent strengths, Prodigy Network was ranked as the lowest ranking ("challenged": 1 star) for many years.
About a year ago, Prodigy Network reached out to me and made a special effort to respond to all the pending questions. So this was an improvement, but at the same time, their investment volume had dried up and become virtually nonexistent. And it was extremely difficult to find any investors who had used the platform and could comment on it. So I raised their rating to the second lowest ranking ("on probation": 3 stars), and took a "wait and see" attitude.
"From the Horse’s Mouth"
Today, I have a lot more access to investor feedback than I used to have. In addition to new sources identified below, there is also the Private Investor Club, which has exploded in size (to 2,000+ members and $2.1 billion+ in investable assets). And unfortunately, the feedback on Prodigy Network has been troubling.
The Bear Runs Over the Bull on "AKA Wall Street"
Several investors recently alleged that they have taken a 40% loss on 84 William Street. This deal was formerly marketed as AKA Wall Street when it was launched on the Prodigy Network in 2013.
It's hard for me to think of a legitimate reason for this kind of blood-bath in the middle of an economic expansion, where the rising tide is helping every boat to float well. Even real estate operators who are barely competent are making money (and some of them, a lot of money). So, in my opinion, a huge loss like this is a giant red flag. And it's also hard for me to imagine choosing to invest with such a sponsor when there are so many other competitors that aren't having this issue. The deal arguably looked problematic from the start.
Prodigy described 84 William Street as "a 19-story luxury extended-stay condominium project with remarkable architecture, located in Manhattan's Financial District, three blocks from the new World Trade Center. It is currently in operation... in a prime location."
The listing had no pro forma provided, which is typical of deals targeted at unsophisticated investors and for me is a red flag. A pro forma is a document where the sponsor projects how the investment will do over the coming years. And a sophisticated investor can challenge the assumptions and often identify sponsors that are being overly optimistic. Without such a document, an investor is unlikely to uncover these problems until it's too late. (More on how to analyze a proforma is in The Conservative Investor's Comprehensive Guide to Picking Deals.)
The deal also had no sales comps, rental comps, or any other supporting documents that sophisticated investors usually require to analyze it. In my opinion, a sponsor that won't provide these docs is unacceptable and a major red flag.
Oh, but It Gets Worse...
A 40% loss is bad enough. But investors further allege they received a letter a few weeks ago, saying that they would need to pony up an additional $9.3 million to "maintain the project solvency"! If they don't, Prodigy will default on the senior and mezzanine debt.
When a deal defaults on its debt, the lender forecloses and takes ownership of the property. This results in a 100% loss of investor money.
So investors have a painful choice. Pour more money into the deal to try to save it, but risk throwing "good money after bad". Or walk away and take a complete loss. Investors report that neither option is very appealing, considering the company's track record and recent revelations (more below).
The "Assemblage"? Or the "Disassemblage"?
Unfortunately, 84 William St. does not appear to be the only problematic Prodigy Network deal. Investors allege that "The Assemblage/17 John", which was also funded in 2013, has not made any of its promised distributions. The entire deal was projected to end and disperse all investor money in 3 to 4 years (and we are currently at year 6).
This deal also arguably looked questionable from the beginning.
The Assemblage was marketed in 2013 as an "opportunity to invest in an equity offering for the development of a prime commercial building located on 17 John Street, in Manhattan’s Financial District. The Assemblage / John Street, will combine 44,000 sq ft of coworking, social and community spaces, 79 furnished short- term apartments and 18,000 sq ft of ground retail space."
Like 84 William St., the Assemblage also appears to have no pro forma or any of the necessary documents for sophisticated investors to analyze it. For the sake of investors in this deal, I hope there will not be another shoe to drop with additional bad news.
"You Stole the Investors' $2.5 million! No, you did!"
A week ago, The Real Deal reported that the CEO, Rodrigo Niño, allegedly told staff that the Chief Operating Officer (Vincent Mikolay) had been fired after allegedly misappropriating $2.5 million of investor money and causing "cash difficulties" for the company.
Mikolay has countersued, alleging that Niño is actually the one at fault, and that Niño had taken "excessive personal distributions and expenses" from the company and presumably away from investors' pockets.
We can't know which of these two claims are accurate (or perhaps if they both are?). The bottom line is that if $2.5 million of investor money was misappropriated, then that is not good news for investors who are currently in Prodigy Network deals. It's also not good if the company is truly “broke” as the Real Deal article alleges. And it also raises the question of why there was so much inadequate oversight to allow something like this to happen.
As a result of all of the above, Prodigy Network has been downgraded by The Real Estate Crowdfunding Review to our lowest rating: (1 out of 10 stars: "challenged").