Synapse Claims Evolve Owes $50M; Evolve Says Synapse’s Ledgers Don’t Add Up

Synapse CEO, GC In Europe While End Users Remain Unable To Access Funds

Hey all, Jason here.

With both Synapse and Evolve filing statements in advance of this morning’s hearing in the bankruptcy case, I thought it worth a quick summary of where things are.

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Synapse Claims Evolve Owes $50M; Evolve Says Synapse’s Ledgers Don’t Add Up

Both Synapse and Evolve filed statements with the court in advance of this morning’s hearing in the ongoing bankruptcy case that has seen end users caught in the cross fire and unable to access their funds since Saturday, May 11th.

This Monday, Synapse and Evolve participated in a court-ordered meet and confer. While the proceedings are not public, based on Synapse CEO Sankaet Pathak’s statements on X and both parties’ court filings, it appears little progress was made.

Monday also saw Synapse lay off all but a skeleton crew of 18 employees and six contractors — a reminder that now-former Synapse staffers are collateral damage in the company’s collapse as well.

Per a leaked recording of a meeting held on Monday, staffers’ benefits, including health insurance, will terminate at the end of May — with no option to extend coverage via COBRA, as Synapse itself will cease to sponsor any benefits program.

Employees are also unlikely to ever see a promised retention bonus, as that payment has become an unsecured claim in the bankruptcy proceedings, as Fintech Business Weekly understands it.

Also on Monday, a now-former Synapse employee emailed the judge overseeing the bankruptcy case, Martin Barash, warning him the company has no plan for an orderly wind down, and, if a resolution isn’t found, end users “are going to be left high and dry.”

The employee’s email became part of the public record, as it is considered an ex parte communication.

Synapse Claims Evolve Is Responsible For $50M Shortfall

Just before noon Pacific Time yesterday, May 23rd, Synapse filed a 71-page status report, including a supporting declaration from cofounder and CEO Sankaet Pathak, which he signed from the posh resort island of Santorini in Greece, and Synapse General Counsel Tracey Guerin, which she signed in nearby Rome, Italy.

Synapse filing claims that, ultimately, Evolve Bank & Trust is seeking to avoid its responsibility to fund a shortfall of approximately $50 million in end user funds. Highlights of the filing include (these are Synapse’s representations, not accepted fact):

• In September 2023, Synapse CEO Pathak communicated with Evolve Chairman Scot Lenoir, “regarding the discovery of Evolve’s improper debits since 2017 exceeding $27,000,000.00 from Depositor funds in Evolve’s FBO Accounts, which Evolve used to pay itself and its third-party compensation.”

• Evolve “retaliated” by demanding Synapse increase its funding of a reserve account to $50 million and withholding compensation due to Synapse in an amount that exceeds $43 million.

• After business bank startup Mercury gave notice it was terminating its contract with Evolve, “Mercury and Evolve notified [Synapse] that they would be moving over $3 billion of alleged Mercury depositor funds from the [Synapse]-related program to an Evolve-direct program.”

• Synapse says that “Mercury and Evolve improperly transferred (without [Synapse]’s review or participation) over $49 million of Synapse- related depositor funds to Mercury’s direct program at Evolve.”

• Synapse says that Evolve holds $102,694,725.72 across 49 FBO accounts, but owes end users a total of $150,437,659.89 — a gap of $47,742,934.17 — which, Synapse says, Evolve is obligated to fund.

• Synapse blames Evolve for causing the TabaPay acquisition to “implode,” leading to “mayhem.”

• Synapse characterized its decision to “pause” Evolve’s access to the “dashboard” on Saturday, May 11th, as being “in an effort to evaluate the situation given Evolve’s shocking representation and alternative transition plans for fintechs and depositors to ensure an orderly wind down after the sale fell through.”

• Synapse also claims the issue with not producing the statements Evolve says it needs has been ongoing for months and is, in fact, due to Evolve’s failure to settle activity.

• Synapse argues that “[b]ecause Evolve knew its actions would destroy the Tabapay Acquisition, Evolve should have had reasonable continuity plans in place for [Synapse]’s immediate wind-down…”

• Synapse represents that it gave each fintech program and bank reports detailing what each bank owed each depositor on May 17th.

• The original filing indicated Lineage had not responded to efforts by Synapse to move toward a resolution, but a subsequent filing offered corrections removing those statements.

• On May 22nd, Evolve responded to records provided by Synapse “with significant requests.”

• The filing argues Evolve is trying to pass blame to Synapse, saying, “Evolve cannot use the [Synapse] as a scapegoat for Evolve’s failure to properly account for its customer deposits and administer the depositors’ accounts and the funds in the FBO Accounts in accordance with sound banking practices.”

• Even for programs and users that were moved to Synapse Brokerage, the filing argues that “[d]epositors were able to deposit funds in the cash management program, or withdraw funds from the cash management program, only through their bank account at Evolve or Lineage. The sole service provided by Synapse Brokerage LLC was the sweep program service, nothing else.”

Evolve Warns Synapse Ledgers Don’t Add Up

For its part, Evolve filed its statement of position regarding Synapse’s failure to provide complete and accurate records, status of freeze on certain accounts, and its plan to distribute funds to end users a bit after 5:00pm yesterday.

Evolve’s statement isn’t a direct reply to Synapse’s, though it did specify that “Evolve generally denies [Synapse]’s claims, including that Evolve owes $150 million to [Synapse]’s end users, and reserves its rights to respond appropriately in due course.”

The statement also emphasized Evolve’s dual priorities: “protecting End Users and maintaining compliance with its regulatory obligations.”

Other notable highlights from Evolve’s filing include (these are Evolve’s representations, not accepted fact):

• Arguing that because “End User funds and the payment functions have been spread across the various banks, the system only works when all of the banks are participating, and all the banks are confident both in the data and that the funds they might be sending are currently available.”

• Evolve expressed “serious concerns as to the accuracy and completeness of the ledgers and other data [Synapse] has provided. Indeed, recent ledgers and data provided by Synapse do not align with the actual movement of funds in and out of Evolve.”

• Evolve argues that, at this point, there is no “restarting” payment processing, and that “the only realistic solution is a wind down with a distribution of funds to the Synapse program’s approximately 200,000 or so End Users.” (It’s unclear if this 200,000 number is the total number of end users of both Evolve DDA programs and Synapse Brokerage programs, or a subset of them.)

• Evolve’s filing indicates in addition to its representatives and Synapse, representatives from Lineage, American Bank, AMG National Trust, and retired bankruptcy Judge Mitchel Goldberg as mediator attended Monday’s meet-and-confer and that the parties “did not reach an agreement.”

• Evolve says that the statements are still not restored, and it needs these in order to assess the accuracy of the ledger.

• Further, Evolve says Synapse hasn’t produced daily ledgers, for each day in question, prohibiting it from doing the analysis it needs to.

• Evolve also says there are substantial inconsistencies in the ledgers Synapse has produced, with information in the ledgers not matching actual money movement in the account by wide margins.

• For example, for the period May 6th to May 15th, the total ledger balance shows non-brokerage end user balances increased by $5,068,741 — but actual money movement in and out of the accounts resulted in a net decrease of $3,294,597.

• The filing further stated that, “Pending further research by Evolve, it is clear that the alleged account balances provided by [Synapse] for Brokerage End Users are not accurate and cannot support a responsible return to payment processing,” and asked the court to order Synapse to provide “complete and accurate ledgers and card settlement reports.”

• Evolve’s statement does include a proposal for how to move foward:

  • For non-brokerage end users (those who did not migrate to Synapse Brokerage), Evolve “is working directly with Platforms to determine the best way to distribute funds to End Users. Evolve will begin distributing Non-Brokerage End User funds as soon as possible, pending confirmation by Platforms.”

  • For brokerage programs, Evolve says it holds $46,926,558.85, which it wants to send to AMG.

  • Evolve also proposes moving an additional $32,660,329 to AMG, which it describes as “[t]he amount of known deficiencies in the FBO Account wholly unrelated to the Brokerage Program or Brokerage migration.”

• The statement attempts to address issues some Brokerage users have raised that their accounts and funds were improperly migrated from Evolve DDAs to Synapse Brokerage accounts, by saying in part, “[E]ach End User agreed that by opening an account through the Platform’s website, the End User authorized the Bank to accept all instructions provided by the Platform or [Synapse] on the End User’s behalf… Evolve relied on the representations of its service provider, [Synapse], in accordance with [Synapse]’s contractual obligations under the MBSA, that such transfers were authorized. Evolve was in no way involved in the Brokerage Program or Brokerage migration.”

Fallout Spreads As Copper Shuts Down Banking Product, Mainvest Shuts Down Altogether, And GigWage Faces Lawsuit Threats From Angry Customers

While most attention has been rightly focused on end consumers who cannot access their accounts, as many as 100 fintech programs themselves are struggling to navigate the fallout from Synapse’s collapse and inability to work with Evolve and the other banks to return funds to end users.

Kids’ investing and banking app Copper, whose end users still cannot access their funds, doesn’t plan to find a different provider and instead is pursuing a dubious pivot to selling its platform as a solution to other banks. Mainvest, an investment marketplace where individuals can support local businesses by providing capital, is shutting down altogether.

And GigWage, a workforce management platform for businesses that employ contractors, is facing threats of lawsuits from multiple upset clients after being less than honest with its communication about the cause of the disruption and when it may be rectified, based on communications between GigWage and clients reviewed by Fintech Business Weekly.

It’s also worth noting Evolve supports numerous programs apart from those that relied on Synapse — including several high-profile ones.

BNPL provider Affirm’s debit card is issued by Evolve. Evolve also provides banking services and card issuing for kids’ banking startup Step. Even respected payments behemoth Stripe has a connection to the troubled bank, as Evolve is one of two partners for Stripe’s Treasury product — which, in turn, powers Shopify Balance. And, of course, though Mercury migrated off of Synapse, it does still work with Evolve, as well as another bank partner, Choice.

To be clear, there is presently no indication of any issues with these programs — but, were Evolve to receive a consent order, it likely would have knock-on impacts to any fintech program on the bank, Synapse client or not.

What’s Next?

There is a court hearing scheduled this morning at 8:00am PT, which is expected to be contentious.

The US Trustee said in filing that it “stands ready to appoint a chapter 11 Trustee,” should the court rule in favor of doing so.

But that is likely moot at this point, as Synapse said in a separate filing yesterday regarding the Trustee’s emergency motion that (emphasis added), “The Debtor will run out of all available cash, terminate the balance of its employees and cease any remaining operations by the end of the day on May 24, 2024.”

With a skeleton crew and dwindling funds, a conversion to a Chapter 7 liquidation seems inevitable at this point — promised “gifts” from fintech clients to enable Synapse to keep operating in Chapter 11 either didn’t materialize or were insufficient.

As far as a timeline on returning funds to impacted end users, hopefully today’s hearing provides additional guidance on when that may happen.

Additional Coverage

Fintech Fight Leads to Hundreds of Thousands of Frozen Accounts (The American Prospect)

Fintech nightmare: ‘I have nearly $38,000 tied up’ after Synapse bankruptcy (CNBC)

Abrupt shutdown of financial middleman Synapse has frozen thousands of Americans’ deposits (AP News)

If You’re Banking at a Non-Bank, Read the Fine Print (Bloomberg Opinion)