It's been close to a year since Synapse, a Silicon Valley startup that maintained transaction ledgers for fintechs and their bank partners, went bankrupt and it was discovered that customers' money totaling tens of millions of dollars
Synapse and its partner banks — Evolve Bank, Lineage Bank, AMG and American Bank — have been blaming each other ever since. Synapse clients such as Yotta, Juno and Mercury are frustrated at how long this process has dragged on.
"It feels like depositors are caught in a he said-she said game between federally regulated banks who are fighting with each other," Yotta CEO Adam Moelis told American Banker. "If that's the case, where are the regulators? Why has this been going on for 10 months?"
On Wednesday, Memphis, Tennessee-based Evolve Bank published a set of account statements that appear to show inaccurate and misleading bookkeeping on Synapse's part.
The documents offer a clue into some of what went wrong in this case. Unfortunately, it doesn't answer the question of where the missing customer funds are today.
Evolve was Synapse's main banking partner until 2023, when the two companies broke off their partnership. According to Evolve, end users' funds were moved from Evolve to Synapse Brokerage, a Synapse unit with a cash management account that swept customer funds into partner banks Lineage, AMG and American Bank to obtain interest and FDIC insurance. According to Synapse, the migration of end users from Evolve to Synapse Brokerage was never completed because Evolve continued to maintain deposit accounts and stopped sweeping customer funds to Synapse Brokerage for settlement.
One collection of documents shows that the monthly statements Synapse provided to Evolve differed from the statements it sent to end users for those same months. From October 2023, after customer funds were transferred out of Evolve, the account statements Synapse sent to Evolve showed zero balances for end users. But the statements Synapse sent to end users told them their full balance remained at Evolve, and included Evolve's routing and account numbers.
"The double accounting problem appears to impact every customer who had a Synapse Brokerage account — this is why customers seem to be confused by the fact that their money was moved by Synapse to Synapse Brokerage partner banks — the statements they were receiving did not show that movement to them," an Evolve spokesman said.
Neither Evolve nor the end user knew that the other was receiving different information, said Edward Somers, an Orrick law firm partner who works with Evolve.
A representative for Synapse said Evolve Bank had access to the exact same statements that end users received, and that Evolve has shared only a portion of the Synapse statements.
Evolve disputes this.
"Evolve did not have visibility into what the end users were actually getting, because we didn't get those" statements, said Aravind Swaminathan, an Orrick partner who is representing Evolve in its class action litigation; he's also a former federal prosecutor who investigated the collapse of Washington Mutual.
"We thought we were seeing what the end users were getting, not something completely different," Swaminathan said. "If you don't know that there's a problem, you can't really look for it. You just assume that people are doing what they're contractually obligated to do, which is provide accurate statements."
The reason Evolve received statements from Synapse after the cut over to Synapse Brokerage in October 2023 is because Evolve continued processing payments such as payroll deposits and card swipes at retailers, to avoid customer disruption, the bank said.
'Magic money'
Evolve is also releasing end user account statements Synapse sent to the bank that show large balance increases from April 2024 to May 2024, but no transactions recorded in either month, and therefore no explanation for the increases. This was true for a double-digit percent of end users, according to Evolve.
"There is no transaction record — either at Evolve or the Federal Reserve — that corresponds to these balances that Synapse showed as suddenly appearing in these accounts," Evolve said in a statement.
Evolve calls this "magic money" and says it affected Yotta and Juno customers.
"Money doesn't magically appear in an account without an underlying transaction to back it up," Somers said.
Asked why Evolve did not catch these discrepancies earlier, Swaminathan said the April 2024 statements didn't get pushed to the Synapse dashboard until May, which is when Synapse declared bankruptcy and shut Evolve out of the dashboard. The May statement wouldn't have gotten pushed out until June, when Evolve still could not access statements.
"Also it was not necessarily indicated at the time that there was any problem with the statements," Swaminathan said. "This problem wasn't something that we'd ever seen before."
According to Synapse, Evolve only shared a portion of customer statements. Synapse representatives also say Evolve only lost access to Synapse's data for 12 hours in May; after that the Synapse bankruptcy trustee provided partner banks access to it.
Because of the apparently mismatched records from Synapse, Evolve has been asking Synapse's three other partner banks for customer transaction data. That information could be triangulated with Evolve's data and Federal Reserve transaction records to determine where each end user's funds are or should be, Evolve said.
One Synapse Brokerage bank, AMG, recently shared some data with Evolve about customer transactions, and as a result, Evolve returned some money to end users last week, Evolve's attorneys said.
"We started to do a data-sharing exercise," Swaminathan said. "We got information from the other banks that led us to reach a conclusion that we held more funds than we initially thought for end users. Once we were able to identify that, we immediately said, 'OK, these are end users' monies,' and so those are being returned." Evolve has some money in reserve for this purpose through its contract with Synapse, though the attorneys declined to say how much.
Sheryl Bollinger, CEO of AMG, said that she hopes Evolve and the accounting forensic team it hired to reconcile the Synapse accounts, Ankura, can help Evolve find additional funds to pay to end users, and that AMG has been willing to share information that might help Evolve reconcile its accounts to Synapse's trial balance.
"However, Evolve has not been willing to explain why it needs the information it has requested or how it intends to use the information," Bollinger said. "Evolve also has been unwilling to provide AMG with the information AMG has requested or even the basic information the bankruptcy trustee requested be shared among the banks. Banks are subject to strict confidentiality requirements, and AMG cannot share its customer data just because another bank requests it.
"We need to know in detail how the data is relevant to the requesting bank's needs and will be used to help resolve an issue with the customer's accounts."
AMG knows how much money it received into Synapse Brokerage's accounts held at AMG and how much it has paid out in accordance with Synapse Brokerage's instructions, Bollinger said, adding that AMG has paid out more than 99% of those funds and continues to pay out the rest as it locates the remaining recipients.
Lineage Bank similarly asserts it does not need to give Evolve and Ankura more information.
"Lineage Bank is disappointed that Evolve Bank and Trust continues to frame the issues surrounding the Synapse bankruptcy in a misleading way, pretending the germane issue is 'where each end user's funds are being held' within the Synapse ecosystem," a Lineage Bank spokesman said in a statement.
"Lineage and the other banks have publicly disclosed to the bankruptcy trustee and the court exactly what they have done with the Synapse-linked funds they held: They have paid the overwhelming majority of the funds out to end users according to Synapse's trial balances, as confirmed by the banks' own independent reconciliations," the spokesman said. "The small remaining balances have been disclosed and are still in the process of being distributed to their rightful owners."
The critical question that remains, according to Lineage, is why the Synapse-generated trial balances exceed the collective balance of Synapse-related funds held at the banks. Lineage said it would continue cooperating with the Synapse bankruptcy trustee and interested parties in the pending court proceedings to understand this. The bank said it has returned about 97% of the funds it held to affected Synapse customers.
"Now that the reconciliation and distribution process is coming to an end, any further record sharing between and among the banks will occur in accordance with the rules of civil procedure and the court's orders in the pending court proceedings," the Lineage spokesman said.
According to Evolve, Lineage Bank and American Bank have not shared any data and have not responded to requests for information. (American Bank did not respond to American Banker's request for comment.)
"The goal is to identify where all end users' funds are held, and we are working hard to put the last pieces together," Evolve said in an open letter it posted last week. "That requires all of the Synapse ecosystem banks — AMG, Lineage and American — to share the transactional data necessary to complete the analysis."
A question of oversight
Industry observers were unsurprised at the idea that there might be evidence that shows shoddy or misleading bookkeeping on Synapse's part.
Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University and the managing principal of Broadmoor Consulting, said a question remains of how much the partner banks should have noticed.
"The argument isn't about whether Synapse screwed up. The answer to that is, absolutely," Baker said. "The question is, what oversight should Evolve, the other banks and the fintechs have exercised to be sure that Synapse was doing what it was supposed to do? From a fiduciary or regulatory standpoint, should Evolve have understood or seen what was going on while all this was happening, and realized that the accounting was wrong and that there was potential fraud?"
Evolve got over its skis in trying to manage indirect relationships with thousands of fintech customers, Baker said.
"Apparently all the bank was doing was following orders from Synapse, whether those were correct or incorrect or related to reality or not," Baker said. "It's more than likely fraud outside of Evolve was at the heart of the problem, but those who had responsibility for supervising the parties with which they contracted also are potentially at fault for failing to monitor Synapse. The question is, should they have known or explored the question before just transferring the money?"
In the past, Synapse CEO Sankaet Pathak has said Evolve deducted large fees from fintech customer accounts. Fintech statements that have been shown to American Banker include $25 million account analysis charges. "Analysis charges" is the term Evolve used for the fees it charges for its services.
"In social media posts, [Pathak] has said that he assumed that Synapse was not going to have to pay any fees whatsoever for the services that Evolve was providing," Swaminathan said. "This is inconsistent with the agreement [that Evolve and Synapse signed], but also just makes no sense."
A theory that fintechs have floated is that when Mercury migrated from Synapse to work directly with Evolve, Evolve accidentally gave Mercury an extra $50 million. Mercury has said this is not true and it would definitely have noticed such a windfall. Evolve acknowledged that it did make an error at one point and gave Mercury a little too much, but then the bank recognized and fixed the error.
"It doesn't make any sense to give more money to one customer than another, because then you're just stuck owing somebody some money somewhere," Swaminathan said. "And there's no evidence that that happened."
Synapse uploaded copies of account statements to a system called "the dashboard" every month so Evolve could see them and make sure Synapse was doing its contractual duty to generate and distribute these statements, according to Evolve's attorneys.
There's also a lingering question as to whether the shortfall in customer accounts existed before the cut over of customer funds from Evolve to the Synapse Brokerage banks.
"We looked at the Synapse ledger as of September 30 of 2023 and we did testing to see whether, as of that date, it appeared to be accurate," Swaminathan said. "Ankura validated that the ledger appeared to be largely accurate as of September 30, before the migration. So most of this problem seems to have occurred in the process of bringing in more ecosystem banks, AMG, Lineage and American, and migrating the monies over there, where Synapse just messed it up. That's what seems to be indicated."
