Ex-FDIC Chair McWilliams Appointed Trustee In Synapse Bankruptcy
Ex-FDIC Chair McWilliams Appointed Trustee In Synapse Bankruptcy
Evolve, Lineage Don't Trust Synapse's Ledgers; Evolve Faces Other Legal Problems
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Friday’s court hearing in the ongoing Synapse bankruptcy case was relatively orderly and brief, at about 90 minutes, compared to the prior week’s chaotic 5-hour meeting.
The hearing primarily focused on the question of whether a Chapter 11 trustee should be appointed or if the case should be converted to a Chapter 7 liquidation.
The two secured creditors, TriplePoint Capital and SVB, argued for a conversion to Chapter 7, saying the bankruptcy estate has essentially no money to continue to fund operations in a Chapter 11. Converting to a liquidation, they argued, would help to preserve any assets that remain — for the benefit of the secured creditors.
The other parties that spoke — banks and fintechs — largely expressed a preference for the appointment of a Chapter 11 trustee, which is ultimately what the judge ordered. Allowing the case to remain in Chapter 11 will give the trustee greater flexibility, Judge Martin Barash reasoned, and the trustee can convert the case to a liquidation if and when appropriate.
Although the trustee’s role in such cases is typically to maximize returns for creditors, Barash emphasized the primacy of doing what needs to be done to return funds to end users, saying:
“The trustee can immediately start speaking to parties in interest and developing a plan to fund the continued preservation of Synapse’s systems and data, and to continue the process of sharing information and hopefully reaching some agreement with the participating banks that allows funds to be returned to end users, to the rightful owners of those funds, as soon as humanly possible.
It’s not necessary to assign blame to do what needs to be done. Today what’s important is getting people their money.”
Following the hearing, paperwork was filed appointing former FDIC Chair Jelena McWilliams as the Chapter 11 trustee — meaning McWilliams, not Synapse’s management, will now be calling the shots for the bankruptcy estate.
McWilliams, currently a managing partner at white-shoe law firm Cravath, was appointed as the Chair of the FDIC in 2018 by then-President Trump.
McWilliams’ approach during her tenure at the FDIC was viewed as more “innovation friendly” towards banks and fintechs, including finalizing a revision to how brokered deposits are defined that was favorable to institutions engaged in banking-as-a-service operating models.
Ultimately, McWilliams served a bit less than four years of her six-year term, resigning after a power struggle with Biden-appointed FDIC board members: CFPB Director Rohit Chopra, OCC Acting Comptroller Michael Hsu, and Martin Gruenberg.
Prior to her appointment at the FDIC, she served as the Chief Legal Officer at regional bank Fifth-Third.
As Chapter 11 trustee, McWilliams has her work cut out for her.
While Synapse says it has produced the necessary files for banks and fintechs to return funds to end users, the banks, namely Evolve Bank & Trust and Lineage, do not agree.
For instance, counsel for Yotta, which appears to be the fintech with the largest impact to its users, said Synapse’s calculations show Yotta end users have about $111 million at Evolve, but Evolve says it’s only holding about $80 million. “The fact is that this is a house on fire,” Yotta’s attorney told the court.
Counsel for Yieldstreet, another fintech client of Synapse, accused Lineage Bank of being “unresponsive and intentionally obstructive” when it came to figuring out how to return end user funds.
Lineage’s attorney fired back that the bank would not be “bullied by wealthier fintechs,” and that the records Synapse has provided are “demonstrably flawed and cannot be verified.” Similarly to representations made in Evolve’s filing preceding the hearing, Lineage’s attorney said that “[t]he ledger does not match the flow of funds that we can see.”
Judge Barash also reiterated a preservation order requiring documents and records to be maintained — including instructing any remaining Synapse employees and former employees to preserve any data in their possession, saying, “Anybody with access to Synapse systems and data, you are specifically enjoined from doing anything that would delete, corrupt or otherwise make unavailable any of Synapse’s electronic systems or data, or any of its hard copy documents if it has any. And if you do there will be serious consequences.”
Yet on Monday, when Synapse laid off all remaining employees apart from a skeleton crew, the company instructed employees to wipe their laptops:
While, in theory, Synapse employees shouldn’t have had sensitive documents stored locally on their devices, in practice, it’s entirely possible they did — and that those records and documents may now be lost.
Where Does This Leave End Users & What’s Next?
Judge Barash ordered a meet-and-confer between the Chapter 11 trustee, who we now know to be Jelena McWilliams, and interested parties in the case.
Barash also ordered the trustee to file weekly status reports with the court and will continue to hold status conferences, with the next such public hearing scheduled for Friday, June 7th.
Although it will take time for McWilliams to get up to speed, given the contentious relationship between Synapse’s management and Evolve, in particular, she may have more credibility and better luck at progressing the situation.
Still, the fundamental problem is that at least some of the parties holding end user money, Evolve Bank, Lineage Bank, AMG Trust, and American National, do not believe the records Synapse has produced to date are accurate — and are unlikely to release funds until they do.
Evolve’s Other Legal Headaches Continue
While the Synapse bankruptcy has become something of a national story, given the potential scope and severity of the impact, it isn’t the only problematic banking-as-a-service platform Evolve partnered with resulting in alleged fraud and lawsuits against the bank.
Evolve also partnered with middleware platform Solid, which recently reached a settlement after being sued by its own investors, who accused it of fraud.
Solid, one of its clients, EZBanc, and Evolve Bank & Trust have been sued by two affiliated companies, BSI Group and International Business Solutions Group, who allege fraud, negligence, and breach of fiduciary duty in their civil suit that seeks to reclaim $9 million that had been held at Evolve.
The convoluted case centers around the director of EZBanc, Gregory Donahue, who changed his name after being barred from the securities industry by Finra and has links to a convicted Russian money launderer.
In a separate case earlier this year, the US Secret Service seized over $5 million held at Evolve that, the government alleges, was the proceeds of a crypto “pig butchering” scam enabled by Solid, Airwallex, Wise, Mercury, and others.
Earlier this month, another suit was filed against Evolve Bank & Trust, Solid, EZBanc, and BSI Group — this time, by two Puerto Rican IFEs, Tolomeo Bank International and Vauban International Bank, and a defunct UK-based foreign exchange firm, Crossbarfx.
The suit alleges conversion, unjust enrichment, negligence, constructive fraud, and breach of fiduciary duty.
The plaintiffs in the case engaged BSI to enable them to offer their clients multi-currency accounts. BSI, in turn relied on Evolve through its relationship with Solid and EZBanc to provide these capabilities.
The allegedly missing $9 million that gave rise to BSI and IBS’s suit against EZBanc, Solid, and Evolve included funds under the plaintiffs’ control.
The plaintiffs allege approximately $2.8 million of the missing funds belonged to their end users.
The plaintiffs, the suit says, honored their commitments to end users, meaning they are currently out of pocket the $2.8 million, which they are seeking to recoup from the defendants.
Other Good Reads
Synapse Claims Evolve Owes $50M; Evolve Says Synapse’s Ledgers Don’t Add Up (Fintech Business Weekly)
Synapse, backed by a16z, has collapsed, and 10 million consumers could be hurt (TechCrunch)
Judge Appoints Trustee in Synapse Bankruptcy Mess (The American Prospect)
Kristin Johnson on Bank Regulation (Bank Reg Blog)
CFPB Avoids Fights Treating Buy Now, Pay Later Like Credit Cards (Bloomberg Law)
Uninsured bank on track for Fed master account approval (American Banker)
Listen: Exclusive Interview: Ramp.com CEO on shipping faster & the company equation (Fintech Brainfood)
Listen: What does Synapse’s collapse signify for the future of BaaS? (11FS Insider)
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