Synapse Trustee: $85M Gap Vs. What Depositors Are Owed
Fmr. FDIC Chair McWilliams Outlines Four Possible Paths Forward On FBO Funds
Hey all, Jason here.
The first status conference since the appointment of former FDIC Chair Jelena McWilliams as Chapter 11 trustee in the Synapse bankruptcy case will take place today at 1:30pm PT.
In advance of that hearing, McWilliams filed a status report with the court — thought it worth providing a quick summary of the key points in that filing prior to the hearing.
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!Synapse’s End Users Owed $265 Million — But Banks Only Hold $180 Million, According To Chapter 11 Trustee
Key points:
The top priority of the Chapter 11 trustee, former FDIC Chair Jelena McWilliams, is restoring end users’ access to their funds
Partner banks hold a total of about $180 million in cash of end user funds and reserve balances vs. an expected trial balance of $265 million — for a shortfall of $85 million
The cause of the shortfall, including whether movements of user funds and negative account balances increased or decreased shortfalls at each partner bank, is not known
Partner banks require substantial additional information to determine the amount of Synapse FBO funds held by each bank and the amount owed to each end user
The bankruptcy estate lacks funds to engage a third-party forensic audit firm or former Synapse employees to aid with reconciliation efforts; McWilliams proposes four possible paths forward, which are likely to be discussed at today’s status hearing
While typically the mandate of a bankruptcy trustee is to maximize returns to creditors, McWilliams goes to great lengths in her initial status report to emphasize the trustee’s top priority is returning funds to impacted end users, saying (spacing adjusted and emphasis added):
The Trustee and proposed counsel have received voluminous communications from affected end users and are further aware of the impact to these end users through media, public filings, and information shared with the Trustee by parties in interest in this Case.
The Trustee shares the Court’s urgency to restore access to end user funds and remains laser-focused on this priority. Since the appointment, the Trustee and proposed counsel have been working around the clock to investigate the events that led to the reconciliation issues and freezing of end user accounts and identify a path to unfreezing customer accounts as soon as possible.
Aware of many personal stories from impacted end users, the Trustee and proposed counsel are working diligently and rapidly to facilitate a resolution.
The status report notes that, beginning in 2014, Synapse opened demand deposit accounts (DDAs) on behalf of fintech programs, but, at some point in 2020, the company developed its cash management program and began opening cash management accounts (CMAs) on behalf of its fintech programs.
Synapse often used multiple banks to provide different functions to fintech programs.
For example, end user deposits for a given partner program were routed to one partner bank (often Evolve), while end user withdrawals for the same partner program were processed from a different account at a different bank (often Lineage).
This, according to the trustee, “makes it both essential and difficult to reconcile transactions and ensure end users receive access to the correct amount of funds due to each end user.”
The four banks are: Evolve Bank & Trust, Lineage Bank, AMG National Trust, and American Bank. Key takeaways from the status report on each bank’s role and current status include:
American Bank held brokered sweep deposits from Synapse Brokerage and provided debit card issuing to five Synapse fintech programs
American Bank did not provide payment processing
Prior to the bankruptcy, American Bank began winding down these programs and, as of May 17th, held less than $50,000 in sweep deposits
AMG began accepting brokered deposits from Synapse Brokerage in August 2023
Beginning in February 2024, AMG also processed ACH and wire transactions for four of Synapse Brokerage’s fintech programs, but did not provide any credit or debit card services
AMG at no time had a direct relationship with Synapse Brokerage’s fintech programs nor end users
AMG holds FBO accounts in the name of Synapse Brokerage and believes end users are the legal beneficial owners of funds held in these accounts
Evolve provides Synapse Financial Technologies (this is distinct from the Synapse Brokerage entity) banking services, including DDAs; Evolve provides payment processing services for Synapse Brokerage
Evolve has FBO accounts in the name of Synapse, which is where the DDA funds are held, and FBO accounts in the name of Synapse Brokerage
Over several months, Synapse Brokerage moved approximately $650 million from Evolve to AMG and other banks as part of the migration of fintech programs and end users to Synapse Brokerage; some of those funds were subsequently moved among partner banks
Evolve has indicated Synapse Brokerage has leveraged omnibus accounts, which were not in the name of individual fintech programs but rather in Synapse’s name
Evolve’s position is that it can reconcile the DDA tied to Synapse Financial Technologies, but that it cannot reconcile Synapse brokerage accounts, as it only performed payment processing for those programs
Lineage provided ACH and wire transfer processing as an originating depository institution (ODFI) for Synapse
Lineage represents that Synapse established a reserve account at Lineage to support its payment processing operations
Lineage says that, in the fall of 2023, it discovered Synapse had moved $60 million of end user funds into its reserve account; upon discovering this, Lineage says it moved those funds into an FBO account for the benefit of end users
In March 2024, Lineage subsequently moved to terminate its contract with Synapse for cause
With the exception of one DDA, Lineage represents it never maintained bank accounts for end users nor entered into agreements with end users, that it was not a program bank or custodian for Synapse Brokerage, and that it was not involved with Synapse Brokerage in any way
In “normal circumstances,” the partner banks holding FBO funds on behalf of Synapse Brokerage would release those funds to Synapse Brokerage, which would then distribute those funds to the respective fintech platforms that are customers of the brokerage.
But, while the Synapse Brokerage entity itself is not in bankruptcy, the brokerage entity shared employees, functions, and systems with Synapse, including “a single, intertwined ledger database on MongoDB.” There are no employees remaining at Synapse Brokerage and thus, the trustee writes, releasing funds to the brokerage is unlikely to result in the timely restoration of funds to end users.
The trustee is unable to engage a third-party forensics firm or former Synapse employees as independent contractors, as the bankruptcy estate lacks the funds to pay for such services. Even if the estate could engage such resources, the work would likely take many more weeks to complete.
Thus the trustee has agreed with the recommendation of some of the partner banks that the banks complete a reconciliation with each other to determine the amount of Synapse FBO funds held by each bank and the amount owed to each end user.
The banks have been coordinating on this reconciliation since the entry of an order authorizing the sharing of necessary data and records, but the banks require additional information, including:
the role, transactions, and funds attributed to Synapse Credit LLC, including how loans made by the entity were funded (an issue I raised in January)
whether Synapse Brokerage maintained its own ledger, or if systems are intertwined such that fintech program-level reports include transactions and balances for multiple Synapse entities
if Synapse’s systems are capable of producing a full trial balance as of May 17th at all partner banks
if Synapse’s systems are capable of generating customer statements as of May 17th and, if so, if they would reconcile with the Synapse ledger and trial balances
the make-up of negative balances and overdrafts associated with certain fintech programs
the criteria Synapse used to allocate negative-balance accounts on the Synapse trial balance and why some partner banks had no negative balance accounts while others had significant negative balance accounts
whether negative balance accounts and their allocations match or approximate the actual FBO cash balance
whether money owed for settlements was deducted from end user accounts as shown and whether that money should have been deducted from excess bank balances instead
whether Synapse turned off automation that triggered settlement payments on or around May 8th
whether Synapse changed allocations for fintech partner funds between May 8th and May 17th, as the ledger indicates, and, if so, how partner banks should fund settlements among one another
whether reserve funds associated with fintech programs can be distinguished from end user funds and from reserve funds associated with other fintech programs
The partner banks have advised the trustee that, collectively, they hold approximately $180 million in total cash across DDA and FBO accounts associated with end users and potential platform reserves vs. trial balances of about $265 million — for a shortfall of $85 million.
According to the filing, the source of the shortfall, including whether movements of end user funds and negative balances increased or decreased the shortfalls that may exist at each partner bank, is not known.
It would take the partner banks weeks, if not longer, to completely reconcile which payments relate to which fintech programs and agree on amounts due to each fintech program and their end users — though some partner banks believe they would be able to reconcile certain amounts of FBO funds with the applicable fintech programs and distribute those to end users sooner, though doing so could result in an overall shortfall.
Partner Banks’ Proposed Next Steps
The partner banks’ interests are not necessarily aligned in this case — presumably some combination of the four will end up on the hook for the alleged $85 million shortfall.
Per the status filing, the banks put forth the following suggestions about what to do next:
American Bank currently holds $43,339.67 of end user funds and claims it is owed $2,337,000 by the other partner banks as a result of unsettled debit transactions from May 8th to May 23rd. American Bank states it has all card transaction data by customer but requires other partner banks’ ledgers by account (node) to determine what each bank owes American.
AMG National Trust says it has worked with all fintech programs on its Synapse/Brokerage-assigned trial balance report to confirm amounts owed to end users are correct. AMG says for fintech programs that plan to continue operating, it should be able to transfer those funds to another custodian. For fintech programs winding down, AMG should be able to work with the programs to determine the best way to distribute funds to end users. AMG believes the best “source of truth” is reconciling Synapse’s ledgers against each fintech program’s data.
Evolve Bank & Trust proposes two possible paths forward:
(1) to have all partner banks consolidate Synapse Brokerage FBO funds into one account, and have the trustee or court determine the amounts to be paid to each fintech or end user; or
(2) to allow the trustee or court to determine the amounts to be paid to each fintech or end user, based on the cash balances held by each partner bank, and have each partner bank make such payments — even if there is a shortfall
Lineage Bank says, apart from DDA-related programs, all funds it holds are verifiably for the benefit of Synapse Brokerage, and that it should transfer such funds to the two entities that had direct relationships with Synapse Brokerage, AMG National Trust and American Deposit Management Co.
McWilliams: Four Possible Paths Forward On FBO Accounts
The partner banks have been able to reconcile and return funds to some DDA end users. The trustee has instructed the partner banks to continue such reconciliation efforts and return funds to DDA users where possible.
However, the FBO accounts pose a greater challenge. The trustee lays out four possible paths forward:
for FBO accounts that can be fully reconciled, release full amounts due, while releasing nothing to FBO accounts that have not yet been reconciled; or
for FBO accounts that can be fully reconciled, release full amounts due, while releasing partial payment to FBO accounts that have not yet been reconciled; or
make partial payments to both fully reconciled and not yet reconciled FBO accounts; or
make no payments until all accounts can be reconciled