Trustee Reports Progress OnReturning Customer Funds In Synapse Bankruptcy Case, But Reconciliation Challenges Remain

Central California Bankruptcy Court: Trustee Jelena McWilliams told the court that partner banks have distributed most funds held in demand deposit accounts (DDAs) to end users, but reconciling and returning funds held in more complex "for benefit of" (FBO) accounts has proven difficult due to discrepancies in Synapse's records and a potential shortfall of $65 million to $96 million. Since the trustee's appointment, Evolve Bank & Trust, one of the key partner banks in the Synapse ecosystem, has distributed about $5.369 million of DDA funds to 3,317 end users across eight FinTech partner platforms. The bank still has about $644,000 in DDA funds remaining to be distributed to 12,339 end users across five FinTech partner platforms and plans to complete DDA funds distribution in about two weeks. However, the situation with Synapse Brokerage LLC's cash management program, where Evolve holds significant funds, is more complex.

** Evolve Bank & Trust:** Evolve is holding about $46.9 million in accounts that were created for payment processing activities on behalf of Synapse. Evolve was not a program bank for Synapse Brokerage's cash management program and, therefore, was not directly holding end-user deposits for this program. Evolve reported identifying "numerous material discrepancies" in the Synapse Brokerage program ledgers that do not align with actual funds movement into or out of Evolve. These irregularities in Synapse's ledgering of Yotta end user funds are just one example of the many discrepancies that Evolve has observed, giving it "great pause" regarding any Synapse Ecosystem Bank making any payments to Synapse Brokerage end users until a full reconciliation by all banks is complete. Despite these challenges, Evolve stated it remains willing to send the funds it holds in Synapse-titled FBO accounts to an appropriate institution with a more complete view of the entire customer relationship and amounts owed.

Other Partner Banks: The status report showed that progress on reconciling and distributing funds from FBO accounts has been slower and more complex across other partner banks as well. American Bank holds about $43,000 in FBO funds, AMG National Trust has released approximately $99 million to over 31,000 end users but still holds about $11 million to be distributed, and Tennessee-based Lineage Bank reported holding aggregate $61.8 million attributed to DDA and FBO accounts in a single FBO account. Since the trustee's appointment, Lineage has distributed $198,601 of DDA funds to about 1,000 end users associated with one FinTech partner and is working to distribute the remaining funds as soon as practicable.

Challenges: Synapse spread end user funds across multiple banks, meaning a single customer could have balances at several institutions; Synapse's records are inconsistent and do not match actual fund flows; large interbank transfers by Synapse before bankruptcy were not clearly allocated to specific end users or FinTech partners; there appears to be a significant shortfall between the cash held in FBO accounts and the amounts owed to customers according to Synapse's records

Next Steps: McWilliams has requested assistance from federal banking and securities regulators to help affected customers understand which banks hold their funds and facilitate communication. She asked the Federal Reserve, FDIC, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Financial Industry Regulatory Authority to make consumer protection resources available and establish a public webpage to field customer inquiries. McWilliams is working to obtain full access to Synapse's records and systems to aid reconciliation efforts. She reported gaining administrative access to a key database (MongoDB) but is still working with Amazon Web Services to access another critical system. To facilitate further reconciliation efforts, she is working to collect and make available all Synapse ledger records, data, and systems on a confidential and read-only basis to all partner banks. Lineage Bank has offered to engage, at its own expense, a former Synapse engineer familiar with the MongoDB database to access the database, make available all ledger records on a confidential and read-only basis to all partner banks, and assist in interpreting ledger data to facilitate further reconciliation. McWilliams said she is in discussions to engage a financial advisory firm with restructuring and forensic accounting expertise to assist with data recovery, potential asset sales, and other matters. She believes the move would likely benefit the estate and end users by facilitating protection and retrieval of Synapse data and potentially enabling the estate to raise funds through asset sales.

Synapse's Subsidiaries: Neither entity is currently in bankruptcy, although McWilliams does not have legal authority to directly manage their businesses. She is working to identify any property of the Synapse estate that may reside with these subsidiaries.

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