The Synapse bankruptcy trustee has identified an $85 million discrepancy between what the partner banks of Synapse, a financial intermediary, are holding and what depositors are owed. This gap was revealed by the court-appointed director in the Synapse bankruptcy case.
According to the trustee, customers of fintech firms using Synapse to connect with banks had $265 million in balances. However, the banks themselves only held $180 million linked to these accounts, as stated by trustee Jelena McWilliams in a document filed late Thursday. This missing $85 million is at the heart of what is being considered the most severe financial panic in the U.S. since the 2008 crisis. Over 100,000 customers from various financial firms have been unable to access their savings for about a month following Synapse’s collapse, an Andreessen Horowitz-backed startup, due to disputes over user balances.
Despite accusations between Synapse and its partners, such as Evolve Bank & Trust, regarding improper balance movements or incorrect ledgers, McWilliams’ report is the first external attempt to gauge the extent of the missing funds.
Many Unanswered Questions
Since being appointed trustee on May 24, McWilliams has collaborated with four banks—Evolve, American Bank, AMG National Trust, and Lineage Bank—to reconcile their ledgers and restore customer access to their funds. However, the banks require more information to complete this task, particularly concerning how Synapse’s brokerage and lending activities may have affected fund flows. McWilliams noted that Synapse apparently mixed funds among various institutions, using multiple banks for the same companies.
The fate of the missing funds remains unclear. “The source of the shortfall, including whether end-user funds and negative balance accounts were moved among Partner Banks in a way that increased or decreased the respective shortfalls that may have existed at each Partner Bank at an earlier time, is not known at this time,” McWilliams wrote.
McWilliams, the former chair of the Federal Deposit Insurance Corporation and now a partner at the law firm Cravath, did not respond to requests for comment.
Difficult Task
McWilliams’ efforts are further complicated by the lack of funds to hire external forensic firms or even former Synapse employees to assist. The last employee at Synapse was terminated on May 24. Despite these challenges, some customers whose funds were held in demand deposit accounts have begun regaining access to their accounts. However, those whose funds were pooled in accounts known as “for benefit of” (FBO) accounts will face a longer wait for their money. McWilliams indicated that a full reconciliation could take several more weeks.
In her report, McWilliams presented Judge Martin Barash with several options to allow at least some FBO customers to access their funds. These options include fully paying some customers while delaying payments to others, depending on the reconciliation status of individual FBO accounts. Another option would involve distributing the shortfall evenly among all customers to expedite access to limited funds.
A Crisis Situation
At a public hearing on Friday, McWilliams recommended that all FBO customers receive partial payments, which “will partially alleviate the effects to end users who are currently locked out of access to their funds” while reserving funds for future payments. However, Judge Barash expressed doubts about how this would proceed.
While expressing his gratitude for McWilliams’ work, Barash admitted that he “struggled” with “what I can do, and how I can help.” He stated that the case is “uncharted territory” and noted that since the depositors’ funds were not the property of the Synapse estate, it was unclear what the bankruptcy court could do. “This is a crisis, and I would like to see a resolution, but I’m not sure if people are looking for court orders, what I can provide in terms of court orders,” Barash said.