Synapse bankruptcy trustee says $85 million of customer savings is missing in fintech meltdown

There
is
an
$85
million
shortfall
between
what
partner
banks
of
fintech
middleman

Synapse
are
holding
and
what
depositors
are
owed,
according
to
the
court-appointed

trustee
in
the
Synapse
bankruptcy.

Customers
of
fintech
firms
that
used
Synapse
to
link
up
with
banks
had
$265
million
in
balances.
But
the
banks
themselves
only
had
$180
million
associated
with
those
accounts,
trustee
Jelena
McWilliams
said
in
a

report
filed
late
Thursday.

The
missing
funds
explain
what
is
at
the
heart
of
the

worst
meltdown
in
the
U.S.
fintech
sector
since
its
emergence
in
the
years
after
the
2008
financial
crisis.
More
than
100,000
customers
of
a
diverse
set
of
fintech
companies
have
been
locked
out
of
their
savings
accounts
for
nearly
a
month
after
the
failure
of
Synapse,
an
Andreessen
Horowitz-backed startup,
amid
disagreements
over
user
balances.

While
Synapse
and
its
partners,
including

Evolve
Bank
&
Trust,
have
lobbed
accusations
of
improperly
moving
balances
or
keeping
incorrect
ledgers
at
each
other
in
court
filings,
McWilliams’
report
is
the
first
outside
attempt
to
determine
the
scope
of
missing
funds
in
this
mess.

Since
being
named
trustee
on
May
24,
McWilliams
has
worked
with
four
banks
—
Evolve,
American
Bank,
AMG
National
Trust
and
Lineage
Bank
—
to
reconcile
their
various
ledgers
so
customers
could
regain
access
to
their
funds.

But
the
banks
need
much
more
information
to
complete
the
project,
including
understanding
how
a
Synapse
brokerage
and
lending
business
may
have
impacted
fund
flows,
said
McWilliams.
She
said
Synapse
apparently
commingled
funds
among
several
institutions,
using
multiple
banks
to
serve
the
same
companies.

What’s
worse,
it’s
still
unclear
what
happened
to
the
missing
funds,
she
said.

“The
source
of
the
shortfall,
including
whether
end-user
funds
and
negative
balance
accounts
were
moved
among
Partner
Banks
in
a
way
that
increased
or
decreased
the
respective
shortfalls
that
may
have
existed
at
each
Partner
Bank
at
an
earlier
time,
is
not
known
at
this
time,”
McWilliams
wrote.

McWilliams,
former
chair
of
the
Federal
Deposit
Insurance
Corporation
and
current
partner
at
the
law
firm

Cravath,
didn’t
respond
to
requests
for
comment.

McWilliams’
task
has
been
made
harder
because
there
are
no
funds
to
pay
external
forensics
firms
or
even
former
Synapse
employees
to
help,
she
said
in
her
report.
Synapse
fired
the
last
of
its
employees
on
May
24.

Still,
some
customers
whose
funds
were
held
at
banks
in
what’s
called
demand
deposit
accounts
have
already
begun
getting
access
to
accounts,
she
said.

But
users
whose
funds
were
pooled
in
a
communal
way
known
as
for
benefit
of,
or
FBO,
accounts,
will
have
a
harder
time
getting
their
money.
A
full
reconciliation
will
take
weeks
more
to
complete,
she
said.

In
her
report,
McWilliams
presented
several
options
for
Judge
Martin
Barash
to
consider
at
a
Friday
hearing
that
will
allow
at
least
some
FBO
customers
to
regain
access
to
their
funds.

The
options
include
paying
some
customers
out
fully,
while
delaying
payments
to
others,
depending
on
whether
the
individual
FBO
accounts
have
been
reconciled.
Another
option
would
be
spreading
the
shortfall
evenly
among
all
customers
to
make
limited
funds
available
sooner.

At
the
start
of
the
public
hearing
on
Friday,
McWilliams
told
Barash
that
her
recommendation
was
that
all
FBO
customers
receive
partial
payments,
which
“will
partially
alleviate
the
effects
to
end
users
who
are
currently
waiting
locked
out
of
access
to
their
funds”
while
keeping
a
reserve
for
later
payments.

But
comments
from
Barash
cast
doubt
on
how
that
would
move
forward.

While
profusely
thanking
McWilliams
for
her
work,
the
judge
said
that
he
“struggled”
with
“what
I
can
do,
and
how
I
can
help.”

The
case
is
“uncharted
territory”
and
because
the
depositors’
funds
weren’t
the
property
of
the
Synapse
estate,
Barash
said
it
wasn’t
clear
what
the
bankruptcy
court
could
do.

“This
is
a
crisis,
and
I
would
like
to
see
a
resolution,
but
I’m
not
sure
if
people
are
looking
for
court
orders,
what
I
can
provide
in
terms
of
court
orders,”
Barash
said.