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Synapse FinTech Scandal
Synapse Financial Technologies, Inc. was an American financial technology company, also known as a banking-as-a-service provider. Founded on April 14, 2014, by Sankaet Pathak, Synapse was headquartered in San Francisco and served the United States market. The company operated as a private entity and offered its services primarily to other fintech companies, enabling them to integrate banking functionalities such as payment processing, account management, and compliance solutions. While Synapse facilitated access to FDIC-insured accounts through its partnerships, it was not a bank itself.
The company garnered significant attention and backing from prominent investors like Andreessen Horowitz. Through its partnerships, Synapse indirectly served over 10 million retail customers and maintained relationships with approximately 100 businesses.
The Bankruptcy Of Synapse
The bankruptcy of Synapse Financial Technologies in April 2024 marked a significant event in the fintech industry, exposing critical vulnerabilities in the reliance on non-bank intermediaries. Synapse, founded in 2014, acted as a middleman for fintech platforms like Yotta and Juno, enabling them to offer banking-like services without holding traditional banking licenses. This model allowed millions of users to access personal finance tools; however, it also created a precarious dependency on Synapse’s infrastructure for ledger management and record-keeping.
Filed For A Chapter 11 Bankruptcy
When Synapse filed for Chapter 11 bankruptcy, its four banking partners—American Bank, AMG National Trust, Lineage Bank, and Evolve Bank & Trust—lost access to the company’s financial records. This left approximately $265 million in customer deposits tied up, with an estimated $90 million remaining unaccounted for. The lack of clear records meant many customers were left with minimal or no refunds. The situation also revealed systemic flaws in how fintech companies handle funds, particularly in the absence of federal protections like FDIC insurance.
Synapse faced Lawsuits
The bankruptcy’s impact extended beyond individual losses, raising broader concerns about accountability and transparency in the fintech sector. Partner banks and Synapse faced lawsuits from affected customers, alleging gross mismanagement of deposits. Although Evolve Bank announced plans to reimburse $46 million to customers, many reported receiving mere fractions of their original balances, highlighting the inadequacy of existing safeguards.
Post Bankruptcy Investigations
The post-bankruptcy investigation into Synapse Financial Technologies has uncovered a web of financial mismanagement and systemic oversight failures, raising serious concerns about the stability of fintech operations reliant on intermediary services. Following Synapse’s Chapter 11 bankruptcy filing in April 2024, investigators focused on reconciling discrepancies in the company’s financial records. At the time of the collapse, Synapse was managing approximately $265 million in customer deposits, largely held in “For Benefit Of” (FBO) accounts across its four partner banks: Evolve Bank & Trust, AMG National Trust, American Bank, and Lineage Bank. However, a significant portion—estimated between $65 million and $95 million—remains unaccounted for.
Synapse Failure To Maintain Account Ledgers
One of the central issues revealed in the investigation was Synapse’s failure to maintain accurate and transparent account ledgers. This failure made it nearly impossible for partner banks and fintech platforms to determine the rightful ownership and distribution of customer funds. Synapse combined transaction data from partner banks with its own records, creating a dependency that left all parties vulnerable when the system failed. The lack of robust ledger management practices directly contributed to the financial chaos, leaving thousands of customers locked out of their accounts.
Partner Bank Also Face Scrutiny
The partner banks involved have faced intense scrutiny for their role in the crisis. Allegations suggest that these institutions failed to push for greater access to Synapse’s financial systems and neglected to develop contingency plans in the event of a service provider failure. Regulatory actions, such as cease-and-desist orders issued to Evolve Bank and a consent order for Lineage Bank, indicate that these banks were aware of operational and compliance deficiencies long before Synapse’s collapse. Despite claiming to have reconciled most customer funds, the banks have struggled to account for the shortfall, blaming each other for missing deposits and inaccurate ledgers.
Victims Of The Synapse Collapse
The collapse of Synapse Financial Technologies has had devastating financial consequences for thousands of individuals, many of whom entrusted significant savings to fintech platforms like Yotta and Juno that relied on Synapse’s banking-as-a-service infrastructure.
A Teacher From Texas
Among the hardest hit was Kayla Morris, a former teacher from Texas, who deposited $282,153.87 into Yotta after selling her home to secure a larger property for her family. Following Synapse’s bankruptcy, Morris was informed that only $500 of her deposit would be returned, leaving her family in financial ruin and struggling to move forward.
$90,000 Disappeared Out Of Nowhere
Zach Jacobs, another victim, deposited over $94,000 through Yotta but received only $130 in refunds. Similarly to Morris, Jacobs was blindsided by the abrupt unavailability of his funds, which he had trusted to be secure. Together, Morris and Jacobs represent the more than 100,000 individuals who were left without access to a collective $90 million in deposits. Many of these individuals were unaware of Synapse’s existence until the collapse made national headlines, exposing the fragility of fintech platforms dependent on intermediaries.
The Class Action Lawsuit Seeks Redress
The class action lawsuit against Synapse Financial Technologies and its partner banks seeks multiple forms of redress for the financial harm caused to thousands of customers who lost access to their funds following the company’s collapse in April 2024. Filed in the United States District Court for the District of Colorado, the lawsuit represents plaintiffs who deposited funds into fintech platforms such as Yotta and Juno, which relied on Synapse’s services to manage those deposits.
Trying To Recover Lost Funds
At its core, the lawsuit aims to recover the lost funds that customers deposited through Synapse’s network. The plaintiffs allege gross negligence, mismanagement, and breaches of fiduciary duty on the part of Synapse’s partner banks—Evolve Bank & Trust, AMG National Trust, Lineage Bank, and American Bank. These banks were entrusted with safeguarding customer deposits but relied on Synapse for ledger management. When Synapse’s records proved materially inaccurate, the banks failed to reconcile the accounts effectively, resulting in unaccounted funds estimated at $85 million.
Seeks Restitution, Compensatory And Punitive Damages
The legal action seeks restitution for the missing funds, as well as compensatory and punitive damages to address the financial and emotional harm suffered by customers. Many were left unable to pay bills or access essential savings, leading to significant financial distress. The lawsuit also demands disgorgement of any unjust profits the banks may have accrued through their mishandling of customer funds.
New FDIC Rule
In response to the financial chaos caused by the collapse of Synapse Financial Technologies, the FDIC has proposed a new rule aimed at strengthening record-keeping requirements for banks that accept deposits from third-party, non-bank entities. This measure addresses critical vulnerabilities in the custodial deposit relationships exposed during the Synapse scandal, where discrepancies in ledger management left tens of thousands of customers without access to their funds. The proposal, announced in September 2024, seeks to ensure banks can accurately identify depositors and access their funds even when intermediaries fail.
Banks Must Keep Detailed Records
A key feature of the proposed rule is the requirement for banks to reconcile custodial accounts daily, maintaining detailed records to identify the individual owners of the funds. These provisions aim to close the gap between banks and third-party entities like fintech firms, which often pool customer deposits into single accounts, making it difficult for banks to determine ownership when disputes arise. The rule will also allow federal regulators to enforce compliance, ensuring banks maintain transparency and accountability in managing these accounts.
The proposal is part of a broader FDIC initiative to address risks associated with bank-fintech collaborations. Past actions include campaigns to educate the public on deposit insurance, advisory letters to curb misrepresentations of FDIC insurance, and updated advertising requirements for deposit products. However, the Synapse scandal underscored the need for more rigorous measures to protect depositors and maintain public confidence in the banking system.
The Rule Ensures Bank View Third Party Deposits
If implemented, the rule would require banks to have a direct and comprehensive view of third-party-managed deposits, enabling them to disburse funds accurately in case of disputes or institutional failures. It also strengthens compliance with anti-money laundering laws by enhancing transparency in custodial account management.
The FDIC has invited public comments on the proposal, signaling an effort to refine the rule based on stakeholder input. While the rule represents a significant step toward safeguarding consumer funds, it also highlights the evolving challenges regulators face as banking increasingly intersects with innovative but complex fintech ecosystems.
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Frequently Asked Questions
The collapse of Synapse was caused by financial mismanagement, including discrepancies in ledger records and the inability to reconcile customer accounts, leaving millions of dollars unaccounted for.
Over 100,000 individuals and businesses were affected, including users of fintech platforms like Yotta and Juno, who lost access to their funds.
The lawsuit seeks restitution for missing funds, compensatory and punitive damages, and systemic changes to improve financial oversight and prevent similar incidents in the future.
The FDIC has proposed new record-keeping rules requiring banks to reconcile third-party custodial accounts daily, ensuring accurate tracking of individual depositors’ funds.
Many customers have joined the class action lawsuit, demanding compensation and accountability from Synapse and its partner banks for their financial losses.
