CBW Accuses FDIC Of Racial, Gender Discrimination, As Trade Groups Support Bank’s Seventh Amendment Claim
SDNY Grand Jury Subpoenas Ex-Synapse Employee, Patriot Bank Hit With OCC Enforcement Action, Once-Hot BloomTech Warns Of Insolvency
Hey all, Jason here.
Whew, after a busy 10 days in the US, I arrived back to the Netherlands on Saturday morning. Had a great time catching up with folks in New York, and really enjoyed my first time in Utah to participate in the University of Utah’s Stena Center for Financial Technology’s Fintech XChange event.
Barring unforeseen circumstances, my next time in the States will be a trip to Vegas in March to speak at Fintech Meetup — more details on that below👇
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SDNY Grand Jury Subpoenas Ex-Synapse Employee, Court Filing Reveals
The US Department of Justice has convened a grand jury to investigate the Synapse disaster, multiple sources with knowledge of the matter tell Fintech Business Weekly and a new filing in the bankruptcy case seems to confirm.
Counsel representing a former Synapse employee, who worked at the company from 2021 to 2024 as its corporate controller and senior director of finance and accounting, filed a motion last week seeking relief from the bankruptcy’s automatic stay for potential payments from Synapse’s Directors & Officers insurance coverage.
A D&O policy is a type of insurance designed to protect a company’s directors and officers from personal financial losses if they face legal action as a result of their managerial decisions. Such policies typically cover legal fees, settlement expenses if applicable, and other costs an organization or its covered officers and employees may incur as a result of legal action.
Synapse’s D&O insurer, Euclid Financial, informed the former Synapse employee that it would only release any approved payments under the policy after receiving an order from the bankruptcy court authorizing it to do so.
The former employee’s motion seeking such approval was filed on January 21st, with a hearing scheduled on the matter for February 11th.
The Chapter 11 trustee, former FDIC Chair Jelena McWilliams, who represents the Synapse estate, has not opposed the motion.
According to the motion, the former Synapse employee received a subpoena on October 16th, 2024, stemming from a grand jury investigation in US District Court for the Southern District of New York.
Multiple sources, granted anonymity given the confidential nature of the criminal inquiry, told Fintech Business Weekly an investigation is underway by the Southern District of New York office of the Department of Justice, in coordination with DOJ’s DC headquarters and its Money Laundering and Asset Recovery Section (MLARS).
Per supporting documents filed with the motion, “[t]he Subpoena directed [the former Synapse employee] to appear before the grand jury and to produce enumerated categories of documents relevant to the investigation.”
A statement of coverage position from Synapse’s D&O insurer, Euclid Financial, to the former employee’s lawyer confirms that the SDNY grand jury is conducting “an official criminal investigation of a suspected felony,” listing the following specific statutes cited in the subpoena the former employee received:
15 U.S.C. § 78j(b) & 78ff and 17 C.F.R. § 240.10b-5, which speak to use of manipulative and deceptive devices related to the purchase or sale of securities;
15 U.S.C. §§ 7202, 7242, and 78f and 17 C.F.R. § 240.13b-2, which speak to rules promulgated by the Securities and Exchange Commission and improper influence on the conduct of audits;
18 U.S.C. §§ 371, 1343, 1348, & 1349, which speak to conspiracy to commit offense or defraud the United States, wire fraud, securities fraud, and conspiracy.
The motion also reveals that, as of January 6th, no other claims have been made on Synapse’s D&O policy — meaning that, if other former Synapse directors, officers, or employees have been subpoenaed in the matter, they hadn’t sought coverage under the policy as of that date.
Asked about the grand jury investigation, a representative for Evolve Bank & Trust wrote via email, “Our awareness of the grand jury investigation is based on the filing made in the bankruptcy court Tuesday. We otherwise don’t comment on ongoing investigations. As has been our goal throughout this situation, we believe End Users deserve to know where their money is, and we are working diligently to make that happen.”
CBW Accuses FDIC Of Racial, Gender Discrimination; Trade Groups Support Bank’s Seventh Amendment Claim
CBW, facing an approximately $20.5 million civil money penalty that could “imperil its existence,” pushed back on the FDIC in a filing earlier this month in the administrative law proceeding that would normally adjudicate the matter.
In the bank’s official answer to the FDIC’s notice of assessment of civil money penalty, the bank paints a picture of being a fintech trailblazer that sought to productively engage with the FDIC, only to be unfairly discriminated against.
CBW’s answer to the FDIC notes that “[u]nder the leadership of Ms. Padmanabhan and Mr. Ramamurthi, CBW has become a pioneer in leveraging fintech innovation to streamline its operations and enhance regulatory compliance” and that its “proactive and innovative approach to banking and compliance earned special recognition from the FDIC.”
CBW has even “received over 24 awards and recognitions for its innovation,” the filing says.
According to the filing, CBW, as a minority-owned depository institution, “sought technical assistance from the FDIC on virtually all aspects of its BSA program, including its risk assessment processes, independent testing, board reporting requirements for non-traditional programs, and strategic planning modifications,” and, on occasions where the FDIC responded to its technical requests, the bank complied with its guidance.
But, after “making critical comments about FDIC management in a board letter,” CBW “[became] a target of the agency,” the bank says in its filing.
The nearly $20.5 million penalty, which, the filing says, stems from years-old conduct in a since-abandoned business line, “appears to be motivated by nothing more than animus towards CBW’s leadership.”
CBW’s filing references the FDIC’s “toxic” workplace culture, as documented in last year’s Cleary Gottlieb report, and alleges that “the FDIC’s internally troubling culture has resulted in outwardly discriminatory statements against Ms. Padmanabhan, an Indian American woman, who serves as CBW’s President, and Mr. Ramamurthi, an Indian American man, who serves as Chairman of the Bank’s Board.”
The filing goes on to cite an alleged 2019 incident in which “an FDIC examiner called Mr. Ramamurthi, ‘a character from Big Bang Theory,’ apparently referencing a character Raj Koothrappali, played by Kunal Nayyar, a man of South Asian origin.”
CBW’s response argues that, in “the absence of any rational explanation for the FDIC’s years-long effort to destroy the Bank,” racial- and gender-based animus explain “the FDIC’s all-out assault on the Bank.”
Bank Trade Groups Seek To File Amicus Brief Supporting CBW
Meanwhile, three bank trade groups sought leave to file an amicus brief in CBW’s suit against the FDIC in US District Court in Kansas.
The American Bankers Association, which represents banks of all sizes and charter types, the Bank Policy Institute, which tends to represent the country’s largest banks, and the National Bankers Association, which represents minority depository institutions, jointly filed a motion on January 21, 2025, asking the court for permission to file an amicus brief supporting CBW’s opposition to the FDIC’s motion to dismiss the case.
The groups’ proposed amicus brief supports CBW’s argument that “when a bank regulator like the Federal Deposit Insurance Corporation (“FDIC”) seeks a civil money penalty for a claim covered by the Seventh Amendment to the United States Constitution, banks and bankers not be deprived of the constitutional protections that would be available before juries in Article III courts.”
The proposed amicus brief attempts to rebut the FDIC’s argument that the Bank Secrecy Act and anti-money laundering issues that gave rise to the proposed civil money penalty against CBW satisfy the “public rights” exception.
Rather, the trade groups argue that, historically “banking enforcement actions have not concerned public rights. Similar to the SEC claims at issue in Jarkesy, the FDIC’s claims here—and those in many other cases—sound in common law. They must be tried before a jury.”
The proposed amicus brief makes two main arguments:
that, while section 1818(i)(1) may prohibit federal courts from second-guessing the merits of an ongoing FDIC proceeding, it does not bar federal courts from jurisdiction over constitutional claims, like the one CBW is making here;
that the FDIC’s proposed civil money penalty does not satisfy the “public rights” exception, because banking enforcement claims, including those at question in the CBW case, are akin to actions in common law, and the FDIC does not meet its burden to show that the narrow “public rights” exception applies in this case.
Patriot Bank Gets First Public BaaS-Related Enforcement Action of 2025
Patriot Bank entered into a material definitive agreement with its primary federal regulator, the OCC, according to an 8-K filed by the bank’s parent company earlier this month.
While perhaps a lesser-known player in banking-as-a-service, Patriot partners with issuing partners Lithic and Apto Payments and powers customer-facing products that include Mercury’s business credit card, Novo’s business debit cards, debit cards for college student spending and credit building startup fizz, and non-custodial consumer savings platform Raisin, among others.
According to its most recent call report filing at the end of Q3 2024, Patriot’s total assets of just under $1 billion are about flat vs. year end 2019, when it held $980 million in assets.
The bank has posted negative net income for three of the five years from 2019 through the end of 2023, and had posted a $28.7 million net loss year-to-date through the end of Q3 2024.
The agreement stems from issues in Patriot’s BSA/AML compliance, strategic planning, capital planning, payment activities oversight, credit administration, and concentration risk management. The agreement requires the bank to:
develop and obtain supervisory non-objection to a three-year strategic plan; the bank may not initiate any action that significantly deviates from the plan without a written determination of supervisory non-objection
achieve and maintain minimum capital ratios of
at least 10% common equity tier 1 capital ratio
at least 10% tier 1 capital ratio
at least 11.5% total capital ratio
at least 9.0% leverage ratio
develop and obtain supervisory non-objection to a three-year capital plan
develop and obtain supervisory non-objection of an acceptable risk management framework guiding the development and implementation of new, expanded, or modified products and services
develop and obtain supervisory non-objection to a written model risk management framework, including implementation and use of third-party models
develop and obtain supervisory non-objection to a written BSA/AML action plan that details the actions necessary to achieve compliance with the Bank Secrecy Act, including a description of corrective actions needed, reasonable and well-supported timelines, and the person(s) responsible
develop and obtain supervisory non-objection to an acceptable written customer identification program to ensure the appropriate collection and analysis of customer information for reloadable prepaid card accounts
develop and obtain supervisory non-objection to a written plan designed to ensure BSA/AML risks associated with providing prepaid card products through third-party program managers are identified, management, and controlled
develop and obtain supervisory non-objection to a written suspicious activity monitoring and reporting program
conduct a suspicious activity lookback review that includes a review of all fraud alerts generated by third-party prepaid card program managers from 12/31/2022 to 12/31/2023
maintain a qualified BSA Officer with sufficient independence, authority, and resources to fulfill the duties of the position
develop and obtain supervisory non-objection to an acceptable payment activities oversight program, including BSA/AML risks involved in processing ACH and wire transactions
develop and obtain supervisory non-objection to a written credit administration program
develop and obtain supervisory non-objection to a concentration risk management program
develop and obtain supervisory non-objection to a liquidity risk management program
Patriot’s agreement with the OCC also designates it as a “troubled” institution, which can limit a bank’s ability to hold brokered deposits, can place limits on executive compensation, and may require prior notice and regulatory approval for changes in a bank’s directors or senior executive officers.
Per its most recent call report, for the quarter ending September 30, 2024, Patriot had an 8.19% common equity tier 1 and tier 1 capital ratio vs. 10.0% required by the agreement; a 9.29% total capital ratio vs. 11.5% required by the agreement; and a 6.53% leverage ratio vs. 9.0% required by the agreement.
As of the end of Q3 2024, Patriot held about $72 million in brokered deposits, or just shy of 9% of its deposit base.
Given the elevated capital ratio requirements and its designation as “troubled” included in the OCC agreement, Patriot may need to seek a waiver from the FDIC to continue holding these brokered deposits or to roll them off its balance sheet.
Y Combinator- and Stripe-Backed Coding Bootcamp BloomTech Warns Of Insolvency
One-time Silicon Valley darling Bloom Institute of Technology, previously known as Lambda School, warns it “may be forced into insolvency,” if a court doesn’t order its insurers to cover legal fees and settlements stemming from numerous legal actions against the company and its outspoken founder and CEO, Austen Allred.
The company offers a private software engineering “bootcamp,” which previously encouraged students to finance their studies through an income share agreement (ISA).
Bloom Institute of Technology, often referred to simply as BloomTech, marketed the ISA structure as part of what it described at the time as a “tuition guarantee,” promising students that, if they didn’t land a job paying at least $50,000 within a year of completing their course, BloomTech would refund 110% of their tuition cost.
The model, with its emphasis on privatized solutions with so-called “aligned incentives,” was tailor-made to appeal to Silicon Valley investors.
BloomTech raised more than $130 million from top-tier venture capital investors and Silicon Valley stalwarts like Y Combinator, GV (Google Ventures), Stripe, and Ashton Kutcher’s Sound Ventures.
But, BloomTech has faced numerous investigations and legal and regulatory challenges, including:
a 2020 Consumer Financial Protection Bureau civil investigative demand, which ultimately led to a consent order that banned the company and its CEO Allred personally from engaging in any student lending activity
a 2020 California Department of Financial Protection and Innovation information request
a 2021 civil investigative demand from the Illinois attorney general
individual arbitration demands from multiple former students in 2021
a 2023 putative civil class action case, which alleges BloomTech lacked approval to operate in California, misled prospective students with an inflated job placement rate, and engaged in the unlawful business practice of unlicensed lending; the case was ultimately dismissed following BloomTech’s successful effort to compel arbitration
at least eight additional arbitration demands in 2024 related to BloomTech’s income share agreements
In BloomTech’s lawsuit filed late last week in US District Court for the Northern District of California, the company argues the four firms it engaged to provide an aggregate of $4 million of Directors & Officers management liability coverage have failed to meet their obligations under the policies.
In its complaint, BloomTech writes that it “does not have the cashflow to continue defending itself against the subject claims and, without insurance, may be forced into insolvency.”
The company seeks to recover more than $2 million from the insurers in defense costs and indemnity for underlying claims against BloomTech and its founder and CEO Allred.
Other Good Reads
GAI Agents, Deposit Stability, and Bank Runs (Todd Phillips for Fintech Takes)
$TRUMP, Memecoins, Grift, and Financial Nihlism (Fintech Brainfood)
Modernizing America's Payments System to Lower Costs and Increase Competition (Penny Lee for Open Banker)
Credit scores are hazardous to your financial health (Sheila Bair for FT)
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