In the latest Synapse bankruptcy hearing in a Central California district bankruptcy court last week, Judge Martin R. Barash went off-script to express his dismay over the thousands of end-user customers
"I was pretty demoralized after our last status conference," Barash said to bankruptcy trustee and former FDIC chair Jelena McWilliams. "Do you have any hope that folks are going to get their money back absent large-scale litigation between and among the banks and the various constituencies?"
McWilliams said this case has been demoralizing for her, too. She explained that she was hoping the four Synapse partner banks (Evolve Bank, Lineage Bank, AMG National Trust Bank and American Bank) would communicate with each other and that the $65 million to $95 million shortfall between what Synapse's ledgers say end users are owed and what banks' ledgers say they are owed would shrink.
"That shortfall has not shrunk despite those efforts," she said. "Something happened along the way someplace that has caused the shortfall to be projected onto the end user's balances."
McWilliams said she receives hundreds of emails weekly from Synapse end users.
"I feel that the system has failed so many end users in so many ways that I am at my wit's end as to how best to help them," because her resources as a trustee are limited, she said.
It's likely the end users will have to sue to get their money back, McWilliams said.
"I know for a lot of them, that's going to be incredibly difficult, and for a lot of them, that will not be even an option," she said. "It has been truly one of the more stressful episodes, both personally and professionally, and I've been through a lot."
The question of who could or should make customers whole is a matter of debate.
"Synapse should be responsible, but it's bankrupt," said Lauren Saunders, managing attorney of the National Consumer Law Center. "Fintech apps should be responsible for the safety of their customers' funds and for replacing any missing money — but of course they aren't insured by the FDIC and you don't really know where the money is, so that is why it is dangerous to put your money in a nonbank banking app."
The banks are only responsible for the money they held, and funds were split between various banks with no clear accounting, Saunders noted.
"Ultimately, what needs to be determined is where the missing funds are, and whoever is at fault for misplacing the funds should bear the cost for it," a Yotta spokesperson said.
There are at least four reasons why it's unlikely the Synapse partner banks will make these customers whole.
1. They don't trust Synapse's ledger.
Evolve Bank said its investigation of Synapse's ledgers "revealed numerous material irregularities and inconsistencies in Synapse brokerage program balances." There were major differences in end-user balances from one day to the next, without corresponding movement of funds, the bank said in a statement.
"Some of these irregularities impact millions of dollars of end user funds, without explanation," Evolve said.
Independent observers agree Synapse's records are sketchy.
"The Synapse and bank ledgers don't match because Synapse's ledger is a paper napkin," said Dmitry Shkipin, a development and operations manager at Geodoma, a geolocation listing service.
2. Each bank thinks another bank or Synapse has the missing money.
Evolve Bank has said it moved "the vast majority" — more than $300 million — of Synapse end-user funds to the three other banks, at Synapse's direction, in October and November of 2023, a year before Synapse filed for bankruptcy.
"We can't speak for the other banks but as we have said, we believe end users deserve to know where their money is, so that the right amounts can be returned to the right end users. Period," the bank said in a statement. "That is why we have been working for months to reconcile questionable Synapse records and initiate our payment process. But we can only return end users' funds we hold.
"We have repeatedly asked other Synapse ecosystem banks to obtain the transaction data needed for Ankura [a consulting firm Evolve hired to reconcile its ledgers with Synapse's records and Federal Reserve files] to undertake the analysis to determine where end user funds are being held — using reliable data, not the Synapse ledger. To do so, we will have Ankura analyze that data and help determine — as it has for Evolve — where end users' funds may be located."
In an FAQ for Synapse end users, Evolve Bank suggested that AMG National Trust or Lineage Bank might have customer funds.
In a joint statement, AMG and Lineage denied this. "Evolve's implication that AMG or Lineage may still hold substantial additional funds for distribution is irresponsible and disingenuous," the banks wrote. AMG has paid out to end users more than 99% of the balance it once held, the bank said. Lineage said it has paid end users more than 90% of the balance it started with.
Yotta points a finger back at Evolve Bank. In its
3. The FDIC's Deposit Insurance Fund cannot be used for this purpose.
In the Synapse bankruptcy hearing last week, a Yotta customer said she thought the savings fintech and its bank partner were FDIC insured, so why doesn't deposit insurance kick in?
"FDIC insurance will not play a role here, will not make you whole," McWilliams said. "The only time that the FDIC insurance pays out is if a bank fails."
By law the Deposit Insurance Fund is only permitted to disburse funds in the event a bank fails, an official said. There is pass-through insurance used by some fintechs including PayPal, but this is dependent on several conditions including accurate recordkeeping, which does not exist in this case.
The FDIC recognizes that fintech customers often don't understand that their money may not be protected by deposit insurance and it's been conducting a public awareness campaign called "Know Your Risk. Protect Your Money." It features photos of a piggy bank rappelling down a cliff, ice skating, doing wheelies on a motorcycle and scuba diving.
Another confusing factor for end users is that fintechs typically blend all their customers' accounts into one custodial or "for benefit of" account at their partner bank. Because FDIC insurance is limited to $250,000, even if deposit insurance applied here, it would only cover a small fraction of these aggregated customer funds.
The FDIC has proposed a new rule that would require banks holding such custodial or "for benefit of" accounts to ensure accurate account records are maintained to determine the individual owners of the funds, including a requirement to reconcile the account for each individual owner on a daily basis.
"The proposed FDIC custodial account rule would help fix this," Saunders said. "It would give the banks a clear accounting of who owns what funds, which would be necessary if a bank becomes insolvent and FDIC insurance is triggered, and making the nonbanks keep better records and helpfully avoid the Synapse situation."
4. There's uncertainty about whether the FDIC would even allow banks to use their own money to make Synapse end users whole.
One banker thought reimbursing customers would violate FDIC rules.
"Without the proper attribution, the funds are not insured," he said. "I have great sympathy for the customers who relied on a fintech that is not a bank to protect them. There is always a tendency to bail out inattentive customers, [but] it seems like this time it doesn't make sense."
The FDIC does not have any law that explicitly prevents banks from helping customers in cases of fraud or error, which somewhere along the way is what this case is about. Sometimes banks do reimburse fraud victims for reputation or business reasons or simply to keep a customer happy. None of the banks in this case have indicated they would do so, however.
