How One Synapse/Evolve Victim Got His Money Back
Discrepancies In Status Reports Cast Doubt On Accuracy Of McWilliams' Work
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How One Synapse/Evolve Victim Got His Money Back
As the Synapse bankruptcy drags into its second calendar year, impacted “end users” (depositors), many of whom have received pennies on the dollar or nothing at all, have little reason to hope for any kind of quick resolution.
That despair was evident in last week’s status hearing in the bankruptcy case, with one impacted end user asking those in attendance how “federally regulated banks could steal $100 million,” with the only thing blocking resolution being the resources to conduct an independent, comprehensive reconciliation (assuming such a task is even possible).
The Synapse Chapter 11 Trustee, former FDIC Chair Jelena McWilliams, echoed these sentiments in the hearing, asking the presumably rhetorical question, “If the purpose of [federal banking regulators’] consumer divisions is not to help in exactly this type of situation, then I ponder what is?”
If commentary in court was pointed, on social media, it veered toward the morbid, with one user posting last week that they hope “there is a Luigi out there for banking,” a reference to cause célèbre, Luigi Mangione, the alleged killer of UnitedHealthcare CEO Brian Thompson.
The most recent status update McWilliams filed with the court reveals few meaningful updates:
A total of $192 million has been returned to end users, which is 87% of the total $219 million that was reported to be held as of May 2024
The exact amount of the shortfall still isn’t publicly known, with the Trustee continuing to report the same $65 million to $95 million range
The Trustee is continuing to facilitate banks’ and fintech programs’ requests for “aggregate data views and records” and is working to make available “a large data set of trial balance records”
The Trustee is now working with an unnamed “third-party ledgering software company,” which has volunteered its services
The Trustee is continuing to evaluate paths for disposition of the estate’s assets; as mentioned during the hearing, the estate has received two bids, which are being evaluated by the estate’s financial advisor, B. Riley
Per the Trustee’s report, as of December 2, 2024, Evolve had distributed $24.6 million in “FBO” funds to end users, but now is refusing to provide updates on the amount of funds its has distributed; Lineage, American, and AMG continue to provide this information
There was no mention or update as to the status of the $35 million in reserve funds Evolve holds; in response to questions from Fintech Business Weekly, a representative for Evolve confirmed the bank still holds these funds
The Trustee recommends that the bankruptcy case remain in Chapter 11 status
Perhaps the most unexpected and notable development was that Evolve seems to have “found” somewhere between $3,730,756 and $3,977,756 of so-called “DDA funds.”
In status reports filed shortly after McWilliams’ appointment as Trustee, Evolve claimed to have held $6,013,000 in DDA funds as of May 24th and had already returned the bulk of them by mid-July. Lineage reporting holding $388,769.25 in DDA funds.
At the time, the Trustee and the banks, including Evolve, characterized these DDA funds as being able to be fully reconciled without issue and quickly returned to end users and fintech programs, as there was no shortfall.
However, careful analysis of the most recent status update shows not only that Evolve is now reporting that, at one time, it would have held an aggregate of $9,990,756 of DDA funds as of May 24th (funds distributed as of January 7th + funds remaining), but, inexplicably, the amount of funds reported to have been held as of May 24th has changed from $6,013,000 to $6,260,000, an increase of $247,000.
The amount Lineage is reported to have held shifted from $388,769.25 to $276,849, a decrease of $111,920.25.
While it’s possible the change in these amounts reported to have been held at Evolve and Lineage on May 24th is just sloppy drafting by the Trustee’s team, there’s no question the aggregate balance of Evolve’s DDA funds was higher than what it initially reported.
Even if the discrepancy in funds reported to have been held as of May 24th is just a bona fide error, it hardly inspires confidence. An inquiry about the cause of this shift sent to the Trustee did not receive a response prior to the time of publication.
Regardless, the Trustee’s report doesn’t explain the increase in DDA funds now known to have been held by Evolve, beyond noting that “Evolve has determined that it holds” these remaining DDA funds and that “Evolve’s investigative efforts continue.”
Evolve declined to file its own status report, presumably owing to the numerous putative class actions pending against it and the other banks.
McWilliams Gives “Both A Warning And A Threat” To Incoming Bank Regulatory Leaders
In response to an end user question about the potential impact of the incoming Trump administration and his appointees to lead federal banking regulatory agencies, McWilliams indicated she had already been in touch with people she believes could be nominated for such roles.
McWilliams promised to “reach out on January 20th,” saying, “it was both a warning and a threat, because I know some of them personally.”
The end user also asked McWilliams how she would have handled the Synapse situation, had it happened during her tenure leading the FDIC.
McWilliams pointed out that, despite Dodd-Frank’s creation of the CFPB, which transferred authority for enforcing consumer protection statues to the newly created bureau, the OCC, FDIC, and Fed have retained “very large” consumer divisions that have continued to grow over time.
McWilliams said that the FDIC has about 1,500 examiners that work on issues related to consumer compliance.
McWilliams continued to say, “If you cannot dedicate those resources of the federal government to cases like this, then I truly ponder, what is the purpose of those divisions?”
McWilliams took direct aim at the current regulatory heads — OCC acting Comptroller Hsu, FDIC Chair Martin Gruenberg, Fed Chair Powell, and CFPB Director Chopra — saying, “I would have loved to have had the agency heads make this a priority, provide more than the 1-800 number for the consumers to call, where you get a claim number and never hear from anybody.”
A Father & Daughter’s Small Claims Case With Same Fact Pattern, Yet Different Outcomes
While the ongoing status hearings and the revelation that many end users would get little or nothing back have dominated this story, one Synapse victim quietly filed suit against Evolve in small claims court — and successfully got all of his money back.
Patrick Spaulding Ryan, a Bay Area lawyer who has worked at and with major tech firms like Google and TikTok and served as a law professor at CU-Boulder and visiting scholar at UC Berkeley, filed suit against Evolve Bank & Trust in small claims court in Alameda County in July 2024. His daughter, Carolyn Ryan, filed a largely similar suit the same day.
Ryan sought to recoup the $7,551.11 he had held in his Yotta account, plus pre-judgment interest and filing and service costs, for a total of $8,081.93.
His trial took place on November 26th, 2024, at 1:30pm.
“Trials” in small claims court, such as they are, are fairly perfunctory affairs, as demonstrated by the minutes of Ryan’s proceeding against Evolve, the only immediately available public record of what transpired that day:
In California, “no attorney may take part in the conduct or defense of a small claims action,” though this doesn’t prohibit a plaintiff who is also an attorney from representing themselves, as Ryan did, or testifying as a fact witness, which he sought to do in his daughter’s case.
Evolve, however, was prohibited from being represented by counsel, and, instead, sent a Bay Area employee: a mortgage advisor who has worked at the troubled bank for about four and half years.
Ryan explained to the judge the circumstances of the case — that, via Yotta, he had deposited funds into Evolve, and that the bank refused to return these funds.
As Ryan explains in what amounts to a “how to” guide for other Synapse/Evolve victims, the Electronic Funds Transfer Act (EFTA) and Regulation E, which implements it, protect users from unauthorized transfers, establish error resolution procedures, and require covered financial institutions to make certain disclosures to consumers.
While Evolve has repeatedly argued that the terms and conditions end users like Ryan agreed to allowed Evolve to accept instructions on their behalf from Synapse or fintech programs like Yotta, Ryan points out that the EFTA and Reg E require affirmative consent by a consumer:
“Preauthorized electronic fund transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer.”
Agreeing to terms and conditions does not meet this requirement, Ryan argues, and he further points out that the burden of proof in disputes over unauthorized transactions is on the financial institution, not the consumer:
“In any action which involves a consumer's liability for an unauthorized electronic fund transfer, the burden of proof is upon the financial institution to show that the electronic fund transfer was authorized.”
The EFTA allows for statutory damages of between $100 and $1,000 per unauthorized transaction.
While Ryan himself couldn’t pursue damages, due to the limitations of small claims court, the potential liability for Evolve, given the number of impacted end users and the number of transactions, could be quite significant.
A representative for Evolve’s law firm Orrick, in response to questions sent by Fintech Business Weekly via email, argues that Ryan’s LinkedIn post “misstates the law” as, “while the Electronic Fund Transfers Act does apply generally to consumer asset accounts, the provisions cited by Mr. Ryan do not apply to his case or to [his daughter] Ms. Ryan’s.”
Ryan and Orrick’s representative describe what happened in court that day and the outcome quite differently.
In Ryan’s telling, he “won,” as the judge ruled in his favor, ordering Evolve to pay him.
Orrick’s representative disputed that characterization, writing in part, “Mr. Ryan’s case did not settle. It was dismissed by the Superior Court of California, County of Alameda.”
While it is accurate that Ryan’s case was dismissed, Orrick’s response is, at best, misleading, as the case was dismissed after the judge ordered Evolve to pay, Evolve did so, and presented proof of payment to the court — which was communicated to the court by Orrick Managing Associate John Badalich on an ex parte basis, in violation of the court’s rules:
Orrick claims that Evolve’s reconciliation efforts, undertaken by third-party consultant Ankura, “determined that Mr. Ryan’s Evolve balance was $7,604.49,” but that Ryan never logged in to the reconciliation portal to claim his funds.
Orrick alleges, without offering any evidence, that, “At trial, Evolve’s representative again offered to send Mr. Ryan these funds and he refused. The Court agreed with Evolve that Mr. Ryan was entitled only to $7,604.49, which is what Evolve originally tried to send him.”
Ryan categorically disputes this account, telling Fintech Business Weekly that, at the trial, Evolve’s representative “had no details to provide me about my account, no transaction record, and spoke vaguely about the Synapse account and the reconciliation process.”
Asked about Orrick’s claim that Evolve’s representative offered him his purported balance during the trial, Ryan said, “This is absolutely untrue. At the trial on November 26, 2024, the judge ordered Evolve to pay me within 72 hours via wire transfer and held the case over to December 3, 2024, to verify payment. There was no offer from [Evolve’s representative] or anyone else at Evolve during the trial to send me $7,604.49 that I refused.”
Evolve, via its third-party administrator, Rust Consulting, ultimately wired Ryan $7,604.49.
Ryan’s daughter, Carolyn, however, wasn’t as lucky as he was.
Evolve’s Lawyers Help Block Return Of UCLA Undergrad’s Student Loan Funds
Despite filing both cases in the same small claims court, at the same time, with substatially the same fact pattern, Carolyn has yet to recoup her funds.
A student at UCLA, Carolyn opened her first bank account at Evolve, though she likely didn’t know that at the time, through Evolve’s third-party service providers, Yotta and Synapse.
The bulk of the funds going into Carolyn’s account at Evolve were the proceeds of her federal student loans — amounts she will be obligated to repay to the federal government, regardless of whether or not she’s ever made whole.
In Carolyn’s case, she is seeking the return of the balance of funds she held as of when Evolve froze access on May 11th, 2024: $2,411.10
But, when she and her father arrived to her small claims court case on January 3rd, Carolyn was surprised to be presented with a cease and desist demand letter from Evolve’s legal counsel, Orrick, Herrington & Sutcliffe.
The letter, signed by Washington, DC-based attorney Amisha Patel, alleged, with no explanation, that Carolyn’s father Patrick Ryan had “engaged in improper and unprofessional conduct toward Evolve’s representative.”
Patel did not respond to multiple phone and email inquiries about the alleged “improper” conduct. Orrick’s response to questions from Fintech Business Weekly did not address questions about what “improper and unprofessional conduct” Ryan had allegedly engaged in.
Patel’s letter continued, “reminding” Ryan that he “may not represent Carolyn Ryan as her counsel in the small claims hearing” and notifying him that Orrick, on behalf of Evolve, planned to request as much from the court.
Patel is not licensed to practice law in California, nor did she seek admission pro hac.
And, as Patel’s own letter notes, “no attorney may take part in the conduct or defense of a small claims action” — which calls into question the validity and ethical appropriateness of the cease and desist letter she and Orrick caused to be transmitted to the court.
Emails between Ryan and Patel discussing Carolyn’s case and the cease and desist letter, reviewed by Fintech Business Weekly, are also copied to Orrick attorney Marc Shapiro and Aravind Swaminathan, the attorney who has been representing Evolve in Synapse’s bankruptcy hearings as of late.
Patel’s cease and desist request was relayed to the court by the Evolve mortgage advisor representing the bank in the proceeding, copying Carolyn, but not until 7:44am the day of her trial.
Carolyn was surprised to be presented with the cease and desist demand, as she had expected her father to be able to attend the hearing with her and to participate as a fact witness.
Orrick’s representative claims that “neither Evolve nor Orrick prevented Mr. Ryan from testifying as a witness during Ms. Ryan’s trial. The Court itself ordered Mr. Ryan not to present any argument or evidence and to refrain from communicating with his daughter (Ms. Ryan) during the hearing.”
However, again, this is at best misleading, as the court made this order pursuant to the cease and desist letter Orrick transmitted to the court on Evolve’s behalf via its representative in the case (item number 1 below):
Evolve’s representative’s email also included Carolyn’s purported “Evolve Transaction History” — a document she had never seen nor had access to prior to being presented with it in court.
The judge in the matter — not actually a judge at all, but rather a local attorney appearing pro tem — asked Carolyn to explain the transactions in her account and the purported ending balance of -$142.97.
Unable to explain the document that she had never previously seen, which included numerous transfers to and from “Synapse Brokerage,” the judge ultimately ruled in Evolve’s favor.
In response to questions from Fintech Business Weekly, the Orrick representative wrote, “Evolve’s reconciliation process determined that Ms. Ryan did not have any funds at Evolve.”
However, the submission of Carolyn’s statements as evidence is premised on the idea that the statements are a true and accurate representation of her account — something called into question by the fact that, per last week’s status report, “Evolve’s investigative efforts continue,” even related to the DDA funds it has previously represented were accurately reconciled without shortfall.
A representative for Orrick confirmed Evolve believes the statements it produced are true and accurate. Asked how Evolve could represent that these statements are true and correct, a representative for Orrick wrote, “Those transaction statements relate to end users whose funds were migrated over to Synapse Brokerage. The other end users are different.”
Typically, small claims court cases are not appealable by plaintiffs; however, in this case, Carolyn is alleging a violation of due process rights, stemming from the lack of adequate notice and time to review the purported statements Evolve supplied, the alleged inappropriate interference from Orrick, and the exclusion of her father as a fact witness, according to Carolyn’s affidavit filed in the case.
Carolyn’s motion requesting that the court vacate the judgment is set for a hearing on January 28th.
Orrick’s representative relayed that “[t]he affidavit attached to Ms. Ryan’s Motion to Vacate contains material misrepresentations of the facts and Evolve intends to oppose the motion and correct the record on Ms. Ryan’s misstatements.”
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