PYMNTS MonitorEdge May 2024

Synapse Bankruptcy Trustee Finds $85 Million ‘Shortfall’ Amid Tangled Web of Accounts

Chapter 11 bankruptcy

Former Federal Deposit Insurance Corp. Chair Jelena McWilliams will present her initial findings as trustee of Synapse’s Chapter 11 bankruptcy case Friday afternoon (June 7).

Ahead of the hearing, a status report filed Thursday (June 6) with the bankruptcy court in California laid out a byzantine tale of money movement.

Arguably the most eye-popping detail: There’s about $85 million in Synapse’s customer funds unaccounted for, and amid a tangled web of fund flows, bank accounts, FinTech accounts and ledgers, restoring access to those funds will prove challenging.

“The trustee shares the court’s urgency to restore access to end user funds and remains laser-focused on this priority,” noted the filing, adding that efforts remain ongoing to uncover what “led to the reconciliation issues and freezing of end-user accounts and identify a path to unfreezing customer accounts as soon as possible.”

Partner banks associated with Synapse held roughly $180 million in customer funds, but customers are actually owed $265 million, leading to the $85 million gap, per the report.

Difficult to Follow the Money

Complicating matters is the inability to hire a forensic accountant, who presumably would be able to help follow the money.

“Due to current estate funding constraints, I do not plan to engage outside financial advisors at this time,” McWilliams said in the report. “…[Synapse] currently appears to have zero available liquidity and has no arrangement with secured lenders to access cash collateral in the event that the estate obtains funding.”

There’s at least some glimpse into what was going on behind the scenes when Synapse was operational. Stretching back over the past decade, the company opened demand deposit accounts (DDAs) on behalf of 100 FinTech platform partners, at four banks, including American Bank, AMG National Trust, Evolve Bank and Trust and Lineage Bank.

“Synapse often used multiple partner banks to service different functions for the same FinTech partner,” the report said. “In certain instances, end user deposits through a FinTech partner were deposited in an account at one partner bank, while end-user withdrawals through that same FinTech partner were processed from a different account at a different partner bank. This business model makes it both essential and difficult to reconcile transactions and ensure end-users receive access to the correct amount of funds due to each end user.”

To make things even more fraught, in the case of Evolve Bank and Trust, McWilliams noted in the report that she has been “informed that Evolve has not been able to reconcile its deposits against the Synapse ledgers due in part to their view that Synapse’s proprietary ledger system is difficult to interpret without expertise from persons familiar with the systems.”

There are no persons familiar with the systems on hand, given the fact that Synapse terminated all employees and contractor relationships last month.

What’s Coming Down the Line

The current approach seems to be that as partner banks have been meeting with McWilliams, they have “expressed the need to collectively share information in order to be able to reconcile ledgers among themselves,” per the report.

But reconciling the accounts is going to take weeks, “if not longer,” the report said.

In the meantime, McWilliams said in the report that there are separate issues with different operations, and the banks have noted that end-user funds they hold are funds held either for the benefit of Synapse or Synapse Brokerage.

In terms of some sort of resolution, as the court filing details, Synapse Brokerage FBO (shorthand reference to a “for benefit of” account) funds could be channeled into a single account, and the trustee/court would determine what gets paid out to each end user. The general Synapse FBO accounts held elsewhere could see partial payments or payments to FBO accounts that can be fully reconciled, or perhaps there may be no payments until every single account can be ultimately reconciled.

McWilliams recommended in the report that the case stay as a Chapter 11 bankruptcy proceeding, and there’s no intent to convert the case to Chapter 7, which would liquidate everything and shut it all down. The intent to make end users whole is clear, but getting there, if it’s possible, will take time and digging.