Atelio Secured Credit Solutions July 2024 Banner

Synapse Trustee McWilliams Details New Challenges in Latest Status Report

It’s one step up and two steps back in the case of Synapse Financial’s bankruptcy, with the court-appointed trustee reporting progress Friday (June 21) in recovering and distributing customer funds. However, serious reconciliation challenges remain, according to the latest status report in the case.

Trustee Jelena McWilliams told the Central California Bankruptcy Court that partner banks have distributed most funds held in demand deposit accounts (DDAs) to end users. However, reconciling and returning funds held in more complex “for benefit of” (FBO) accounts has proven difficult due to discrepancies in Synapse’s records and a potential shortfall of $65 million to $96 million.

“The impact of Synapse’s bankruptcy on end-users has been devastating,” McWilliams wrote in a letter to federal regulators included in the court filing. “I understand that, without these funds, many end-users are unable to pay for basic living expenses and food.”

Evolve Bank & Trust, one of the key partner banks in the Synapse ecosystem, has made significant progress in distributing funds but also faces substantial challenges, according to the trustee’s report and a separate statement from Evolve included in the filing.

Since the trustee’s appointment, Evolve has distributed about $5.369 million of DDA funds to 3,317 end users across eight FinTech partner platforms. The bank still has about $644,000 in DDA funds remaining to be distributed to 12,339 end users across five FinTech partner platforms. Evolve stated it plans to complete DDA funds distribution in about two weeks.

However, the situation with Synapse Brokerage LLC’s cash management program, where Evolve holds significant funds, is more complex. Evolve is holding about $46.9 million in accounts that were created for payment processing activities on behalf of Synapse. According to the report, Evolve was not a program bank for Synapse Brokerage’s cash management program and, therefore, was not directly holding end-user deposits for this program.

Evolve reported identifying “numerous material discrepancies” in the Synapse Brokerage program ledgers that do not align with actual funds movement into or out of Evolve. The bank emphasized that any single bank cannot complete full reconciliation without more collaborative work across the Synapse ecosystem.

In its statement, Evolve highlighted a specific example of ledger irregularities: A Synapse-provided ledger dated April 11, 2024, showed $109 million in balances for users of one FinTech (Yotta) across several institutions. However, a month later, a May 17 ledger showed only $1.4 million remaining for these users, with no corresponding transfers to Evolve or apparent payouts to users.

“These irregularities in Synapse’s ledgering of Yotta end user funds are just one example of the many discrepancies that Evolve has observed,” the bank stated, adding that such issues give it “great pause regarding any Synapse Ecosystem Bank making any payments to Synapse Brokerage end users until a full reconciliation by all banks is complete.”

Evolve also noted that, given its role as a payment processor for RDFI (receiving depository financial institution) activity, it could only state the funds it has are net payment activity for the cash management account. The bank stressed that Synapse Brokerage needs to explain the observed discrepancies, stating it is unable to do so given its limited role in the cash management program.

Despite these challenges, Evolve stated it remains willing to send the funds it holds in Synapse-titled FBO accounts to an appropriate institution with a more complete view of the entire customer relationship and amounts owed. The bank pledged to continue cooperating with the trustee and working with other Synapse ecosystem banks to perform reconciliation and determine the most appropriate path forward.

Challenges at Other Partner Banks

The status report showed that progress on reconciling and distributing funds from FBO accounts has been slower and more complex across other partner banks as well. American Bank holds about $43,000 in FBO funds. AMG National Trust has released approximately $99 million to over 31,000 end users but still holds about $11 million to be distributed.

Tennessee-based Lineage Bank reported holding an aggregate $61.8 million attributed to DDA and FBO accounts in a single FBO account. Based on Lineage’s reconciliation of $388,769 of DDA funds, the remaining $61.5 million in this account are FBO funds. Since the trustee’s appointment, Lineage has distributed $198,601 of DDA funds to about 1,000 end users associated with one FinTech partner and is working to distribute the remaining funds as soon as practicable.

The trustee highlighted several challenges complicating efforts to return customer funds:

1. Synapse spread end user funds across multiple banks, meaning a single customer could have balances at several institutions.

2. Synapse’s records are inconsistent and don’t match actual fund flows.

3. Large interbank transfers by Synapse before bankruptcy were not clearly allocated to specific end users or FinTech partners.

4. There appears to be a significant shortfall between the cash held in FBO accounts and the amounts owed to customers according to Synapse’s records.

“Synapse’s final trial balance reflects millions of missing funds in the Synapse ecosystem,” Lineage Bank wrote in a statement included in the court filing. “Lineage, the partner banks, and the Trustee presently lack a clear understanding of the exact amount or the origin of this cash shortfall.”

Lineage Bank further elaborated on the challenges, noting that Synapse’s business model was dependent on accessibility to multiple FDIC-insured banking institutions. “Against the backdrop of a perceived ‘modern’ and ‘more accessible’ banking framework, Synapse spread end user funds across multiple banks,” Lineage stated.

And it later added: “Synapse’s business model was dependent on its accessibility to multiple FDIC-insured banking institutions. Against the backdrop of this framework, Synapse spread end-user funds across multiple banks. Thus, a single end user could have a $50 balance at Bank A, a $100 balance at Bank B and a $50 overdraft at Bank C. This significantly complicates the reconciliation process.”

Regulatory Assistance and Next Steps

McWilliams has requested assistance from federal banking and securities regulators to help affected customers understand which banks hold their funds and facilitate communication. She asked the Federal Reserve, FDIC, Office of the Comptroller of the Currency, Securities and Exchange Commission and Financial Industry Regulatory Authority to make consumer protection resources available and establish a public webpage to field customer inquiries.

In her letter to regulators, McWilliams wrote, “I respectfully ask that the Federal Reserve, FDIC and OCC make consumer protection staff and other resources available to the public to help end-users understand which Partner Bank holds their deposits and facilitate end-users’ interaction and communication with relevant Partner Banks.”

McWilliams is working to obtain full access to Synapse’s records and systems to aid reconciliation efforts. She reported gaining administrative access to a key database (MongoDB) but is still working with Amazon Web Services to access another critical system.

To facilitate further reconciliation efforts, she is working to collect and make available all Synapse ledger records, data and systems on a confidential and read-only basis to all partner banks. Lineage Bank has offered to engage, at its own expense, a former Synapse engineer familiar with the MongoDB database to access the database, make available all ledger records on a confidential and read-only basis to all partner banks and assist in interpreting ledger data to facilitate further reconciliation.

McWilliams said she is in discussions to engage a financial advisory firm with restructuring and forensic accounting expertise to assist with data recovery, potential asset sales and other matters. She believes the move would likely benefit the estate and end users by facilitating protection and retrieval of Synapse data and potentially enabling the estate to raise funds through asset sales.

The trustee’s report also touched on the status of Synapse’s subsidiaries, Synapse Brokerage LLC and Synapse Credit LLC. Neither entity is currently in bankruptcy, and while McWilliams has indirect authority over both entities through Synapse’s ownership, she does not have legal authority to directly manage their businesses. She said she is working to identify any property of the Synapse estate that may reside with these subsidiaries.