Yotta Alleges Theft of Customer Funds in Evolve Lawsuit

The continued fallout from the collapse of Synapse Financial Technologies has heightened the discussion — and regulatory examination — of how end-user and various types of accounts are handled as FinTechs and banks join forces.

As a new legal front to the saga opens in a courtroom, the chorus calling for change will only grow louder.

To that end, FinTech Yotta sued Evolve Bank & Trust in California on Friday (Sept. 13), alleging that the bank had engaged in “gross misconduct” and also “brutal theft” in its handling of end-user funds.

The suit centers on not just how end-user funds were treated but also finds fault with Evolve’s handling of “for benefit of” accounts (also known as FBO accounts). As PYMNTS has reported, Synapse customer funds that have been unaccounted for at the time of its bankruptcy stood at about $85 million.

‘Failed Its Most Basic Duty’

The opening salvo of the suit: “This is a case about a bank that utterly failed in its most basic duty to its customers, misappropriating and/or misplacing tens of millions of dollars in customer funds,” Yotta wrote in court documents.

Yotta noted that it “is not itself a bank and does not hold customer deposits. Instead, to the extent that its customers deposit money for safekeeping, those deposits go directly to regulated, FDIC insured institutions like Evolve.”

The FinTech alleged that after a four-year relationship, Evolve “suspended access to all monies” belonging to Yotta customers. Evolve debited customer accounts for over $25 million, according to Synapse’s records, held in FBO accounts.

“These transactions were never authorized by customers,” Yotta wrote, and the debits should not have taken or charged as fees.

Elsewhere in the filing, Yotta stated that Evolve and Synapse had “misappropriated” about $50 million.

The Relationship Itself

Yotta also addressed the relationship between Evolve and Synapse.

“In lay terms, Evolve and Synapse would work together to service Yotta’s end users. Customer funds were always custodied at Evolve. Evolve’s electronic systems would process certain transactions, and Synapse would play a role in processing other transactions with funds located at Evolve,” Yotta wrote in a court filing.

“Synapse combined Evolve’s data stream with its own customer transaction data and deliver the combined data to Yotta and customers,” Yotta added. “The combined data stream was supposed to include (a) each and every transaction in each and every customer’s account and (b) each customer’s current account balance so that Yotta and the customer knew precisely how much money was in their account.”

The FinTech noted that it “received detailed, user-by-user transaction data on a continuous basis from Evolve and Synapse. Because it was custodying end users’ funds, it was critical that Evolve report each and every transaction that it handled involving end user funds.”

Yotta is asking the court to award damages for fraud.

“Had Yotta known the truth about Evolve’s malfeasance, it never would have done business with Evolve, and Yotta’s customers would have been spared a brutal theft at the hands of this bank,” the company said in the filing.

Whether or not Yotta’s allegations will be borne out will take time, as expected from a courtroom battle of this magnitude.

The legal wrangling comes as the Federal Deposit Insurance Corp. (FDIC) proposes a rule to strengthen recordkeeping for bank deposits received from third party, non-bank companies that accept those deposits on behalf of consumers and businesses, as PYMNTS reported Tuesday (Sept. 17).

“The Notice of Proposed Rulemaking approved by the FDIC Board today is an important step to ensure that banks know the actual owner of deposits placed in a bank by a third party such as Synapse, whether the deposit has actually been placed in the banks, and that the banks are able to provide the depositor their funds even if the third party fails,” FDIC Chairman Martin J. Gruenberg said in a release that accompanied the proposed rule making.

The proposed rule would require FDIC-insured banks holding certain custodial accounts to ensure accurate records are kept to determine the individual owner of the funds and to reconcile the account for each individual owner on a daily basis.