"Full Reconciliation... May Not Be Possible," Synapse Trustee Says
Synapse Co-Mingled Funds; Former CEO's Next Venture Raising $11M With Dubious Claims
Hey all, Jason here.
As I’ll be traveling this evening and attending a wedding over the weekend, getting you an early update on the latest Synapse filing in advance of today’s status conference.
Please note, there will be no Sunday newsletter this week — resuming regular cadence the following Sunday, June 23rd.
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!“Full Reconciliation... May Not Be Possible,” Synapse Trustee Says
In advance of today’s status conference, the Chapter 11 trustee filed a weekly status report.
The report briefly summarized the history of the bankruptcy case and reconciliation efforts to date, with the following notable new information:
Accounts held as DDAs are fully reconciled
Evolve Bank & Trust has already distributed approximately $4.09 million from such DDA accounts — “on instructions from its regulator,” according to the filing — and has an additional $2.28 million ready to distribute
Lineage Bank has $388,769 of DDA funds to distribute
AMG National Trust and American National hold no DDA funds
Regarding FBO balances
American Bank holds $43,339 for a single fintech program, claims no shortfall vs. expected balances, and intends to send those funds to other partner bank(s) for that fintech program
However, American Bank claims it is owed $2,337,000 from other partner banks for unsettled debit card transactions
AMG has approximately $57.7 million of FBO funds and $150,000 of “unallocated” interest payments; it claims no shortfall vs. expected funds
Evolve Bank & Trust holds about $46.9 million it received as the RDFI for Synapse Brokerage; it hasn’t completed reconciliation thus cannot yet confirm if there is a shortfall and, if so, the size
Lineage bank holds about $61.4 million and says it does not have adequate data to determine if there is a shortfall
Based on reconciliation work since the last status report, the potential shortfall in end user funds is now believed to be somewhere between $65 million and $96 million; it’s not immediately clear why this number changed vs. the prior report
The trustee has been unable to gain access credentials to Synapse’s AWS instance, as, according to the status report, two ex-Synapse engineering employees are the only ones with said information, and they have not responded to outreach from the trustee
Most of the work to complete reconciliation and settlement payments between the banks and identifying the sources of shortfalls could be completed in the next two weeks, McWilliams, the Chapter 11 trustee, writes.
However, McWilliams warns that (emphasis added) “[w]hatever shortfall the Partner Banks are unable to reconcile in that timeframe is most likely unreconcilable without far more extensive efforts, expense and technical expertise, which would require resources that the estate does not have. Even if these efforts could be undertaken, full reconciliation to the last dollar with the Synapse ledger and Fintech Partner’s ledgers may not be possible.”
Further reconciliation is “likely to result in a shortfall that predates Synapse’s bankruptcy petition,” McWilliams writes, pointing to the legal dispute between Synapse and one-time client Mercury as well as former CEO Sankaet Pathak’s blog post on the topic.
Mercury has denied that it moved any end user funds that it should not have.
On the question of the trustee’s authority over funds owed to end users, McWilliams clarifies that the trustee only has authority over the bankruptcy estate’s property — end user money is not property of the estate, except to the extent that Synapse itself was an end user in the Synapse “ecosystem.”
Any funds owed to Synapse itself currently being held at the four banks, presumably, would be returned to the bankruptcy estate — where the two secured creditors, TriplePoint and SVB, would be first in line to make claims on it.
McWilliams explicitly writes that (emphasis added) “[t]he Trustee does not have legal authority to direct the timing, amounts or method of Partner Banks’ disposition of these funds,” meaning that, at the moment, it’s on the four banks to determine how to proceed regarding releasing or returning end user funds, including how to handle any shortfall.
McWilliams lays out some of the considerations those banks have, including:
whether to make pro rata payments to fintech programs or end users, if there is a shortfall in funds
de-prioritizing reconciliation and payouts of end user accounts with balances less than $1
distributing funds to fintech programs rather than end users, if banks are unable to locate end users
distributing funds to end users even if funds are held in FBO accounts in the name of the fintech programs, if the programs have ceased operating
determining how to distribute funds (check, wire, etc.)
McWilliams concludes by suggesting the case remain in Chapter 11 for the time being, but that it is likely to convert to a Chapter 7 liquidation shortly.
Synapse Co-Mingled Funds, Former CEO Says Under Oath
Earlier in the week, Synapse cofounder and former CEO Pathak and former GC Tracey Guerin gave sworn testimony during the creditor committee’s meeting.
During the approximately thirty minute hearing, McWilliams asked Pathak and Guerin about a number of topics, including the purpose and use of the non-debtor subsidiaries, Synapse Brokerage LLC and Synapse Credit LLC, and their relationship to parent company Synapse Financial Technologies, Inc.
McWilliams also asked a number of questions about the composition of funds held in FBO accounts, including whether FBOs potentially held funds belonging to fintech programs or to Synapse itself.
In response to McWilliams’ questions, Pathak clarified that fintech programs and even Synapse itself were considered “end users” in Synapse’s “ecosystem.”
McWilliams sought to clarify this, by asking Pathak, “Let me also clarify, so, what you’re saying is that a DDA or FBO account at Evolve would have, could have Synapse funds in addition to end user and platform funds in them?” to which Pathak replied, “Exactly.”
On X, Pathak disputed the characterization of this arrangement as co-mingling funds, writing in part:
“What I was saying is that all fintechs (including synapse) hold some operating capital in the ecosystem. In case of platforms its for paying for cards printing, payment processing etc. all of those are realtime charges. Synapse also generated payment processing revenue which was stored in an operating account in the ecosystem. All of those accounts are separate and banks received daily trial balance reports on each depositor - including the fintechs and synapse.”
Former CEO’s Next Venture Raising $11M With Dubious Claims
In a twist only possible in Silicon Valley, Pathak has already moved on to his next venture, filing paperwork to incorporate Foundation Robotics Labs, Inc., on April 5th.
The company is seeking to raise an $11 million seed round and claims to already have $10 million in commitments from Tribe Capital and automaker GM, Fintech Business Weekly was the first to report.
An investment solicitation, reviewed by Fintech Business Weekly, claimed GM agreed to let the company collect “ground truth” data at the automaker’s factory in Mexico. The communication claimed Foundation is targeting a $300 million purchase order from GM, and that GM would invest alongside Tribe in the seed round.
However, a GM spokesperson denied any significant relationship with the company, telling Fintech Business Weekly, “GM has not been in discussions with Foundation on a contract, investment, or even a proof of concept.”
Mike LeBlanc, who’s described as a cofounder of the robotics startup, confirmed to CNBC the relationship with GM was “overstated” and that he was “embarrassed” about the materials marketing the investment.
Other Good Reads
Firms Can Evaporate Your Life Savings (Jacobin)
How is it possible Synapse and Banks can't find a $85m shortfall? (Fintech Brainfood)
Why Issuing Credit Cards Is Hard (Fintech Takes)
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