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A federal bankruptcy judge appointed an independent Chapter 11 trustee to failed fintech middleman Synapse on Friday, as more than 200,000 customers still await access to their money.
The company had planned “to terminate all employees by close of business today,” according to one of its attorneys who participated in a Zoom-only hearing on Friday. Synapse has drained all of its assets and even before today was operating with a skeleton crew. “All our funds are gone, Your Honor,” said one of its attorneys. Meanwhile, CEO Sankaet Pathak called into the bankruptcy hearing from Santorini island in Greece, and the general counsel Tracey Guerin was in Rome.
Synapse’s chaotic bankruptcy, and particularly the collapse of a deal to buy its assets out of the Chapter 11 process, has led to customers of fintech companies who worked with Synapse being locked out of their bank-like accounts for nearly two weeks. The Chapter 11 trustee, who will take over daily management from the CEO and top officers, would have the primary goal of untangling the disputes Synapse has with its bank sponsors and get people back their money.
“The trustee can immediately start speaking to parties in interest and developing a plan to fund the continued preservation of Synapse’s systems and data, and to continue the process of sharing information and hopefully reaching some agreement with the participating banks that allows funds to be returned to end users, to the rightful owners of those funds, as soon as humanly possible,” said Judge Martin Barash of the Central District of California, who has been hearing the bankruptcy case. “It’s not necessary to assign blame to do what needs to be done. Today what’s important is getting people their money.”
The U.S. bankruptcy trustee for the region proposed the assignment of a Chapter 11 trustee, rather than converting the case to a Chapter 7 liquidation, which most people associated with the bankruptcy agree will eventually be needed. The U.S. trustee expected the Chapter 11 trustee to be appointed today, as one candidate has already been approved and vetted.
UPDATE: Jelena McWilliams, the Trump-era FDIC chair, has been appointed the Chapter 11 trustee in this case. During her tenure on the FDIC, the agency issued a brokered deposit rule that allowed fintechs to use them, enabling larger accounts with these non-banks.
Secured lenders—including the remnants of failed Silicon Valley Bank—wanted to immediately move to Chapter 7 to preserve cash. But Synapse is still needed to resolve accounts and return money to customers.
The problem is that there are still major discrepancies between Synapse’s numbers and those of the bank sponsors it partnered with to provide financial services to fintechs. The ledger discrepancies are “substantial,” said one attorney for the fintech Yotta, one of the largest caught up in the chaos. Synapse has stated that $111 million in Yotta funds are in the hands of its sponsor bank Evolve, but Evolve puts that number at only $80 million. “The fact is that this is a house on fire,” the Yotta attorney stated.
Since last Friday, no users have been able to create any transactions for their accounts, at fintechs like Yotta, Juno, and Yieldstreet. Some of these companies have been “gifting” Synapse money to keep it alive while it works out the account figures.
Synapse management has been insistent that it has checked and confirmed all the numbers on the ledger. But the extreme differences with the sponsor banks make the Chapter 11 trustee’s job difficult, and threaten to considerably delay the ability for customers to get their money back. “As the court has seen, there appears to be a large disagreement,” said the attorney for Evolve Bank at the hearing. “We think a Chapter 11 trustee will allow us to get the information we need. We hope that dealing directly with the trustee, we can cut to the chase.”
Lineage Bank, another sponsor bank, was accused by one fintech, Yieldstreet, of being “unresponsive and intentionally obstructive” about the return of customer funds. “Lineage has not been available and counsel has not been specific in what they need,” said Yieldstreet’s attorney.
Lineage fired back that the bank had been in communication with all parties, but they simply did not believe Synapse’s figures. “The records are demonstrably flawed and cannot be verified. The ledger does not match the flow of funds that we can see,” said Lineage’s attorney. “We are not going to be bullied by wealthier fintechs … The primary problem that faces all of the banks and fintechs is that the debtors’ records are not reliable.”
Judge Barash ruled that the Chapter 11 trustee would need to file regular status reports weekly, and status conferences would continue in person on Fridays. He directed the trustee to “meet and confer” with all the parties in the case, and he forcefully reiterated a preservation order for Synapse’s current and former employees. “Anybody with access to Synapse systems and data, you are specifically enjoined from doing anything that would delete, corrupt or otherwise make unavailable any of Synapse’s electronic systems or data, or any of its hard copy documents if it has any,” said the judge. “And if you do there will be serious consequences.”
The judge also expressed continued regret that customers still didn’t have any access to their money. “You can’t help but feel awful when you hear people say they can’t buy food, or make a mortgage payment, or pay rent,” he said. “This is a horrible situation.”
