The trustee says $85 million in customer savings is missing

There is an $85 million shortfall between what fintech broker Synapse's partner banks hold and what depositors are owed, according to the court-appointed trustee in Synapse's bankruptcy.

Clients of fintech companies that used Synapse to connect with banks had balances worth $265 million. But the banks themselves only have $180 million tied to those accounts, Trustee Jelena McWilliams said in a report filed late Thursday.

The missing money explains what's behind the worst collapse in the US fintech sector since it emerged in the years after the 2008 financial crisis. More than 100,000 customers of a variety of fintech companies were locked out of their savings accounts for about a month after the company failed. Synapse, a startup backed by Andreessen Horowitz, is in the midst of controversies over user credits.

While Synapse and its partners, including Evolve Bank & Trust, have made accusations of improperly transferring balances or keeping incorrect books to each other in court filings, McWilliams' report is the first outside attempt to determine the scope of the money missing in the mess.

Since being appointed trustee on May 24, McWilliams has worked with four banks — Evolve, American Bank, AMG National Trust and Lineage Bank — to reconcile their various ledgers so customers can regain access to their funds.

But McWilliams said banks need more information to complete the project, including understanding how Synapse's brokerage and lending businesses affect money flows. She said Synapse apparently commingled funds between multiple institutions, using multiple banks to service the same companies.

What's worse, she added, is that it remains unclear what happened to the missing money.

“The source of the shortfall, including whether end-user funds and negative balance accounts were transferred between partner banks in a manner that increased or decreased the shortfall in question that may have previously existed at each partner bank, is unknown at this time.” McWilliams wrote.

McWilliams, a former head of the Federal Deposit Insurance Corporation and current partner at the law firm Cravath, did not respond to requests for comment.

She said in her report that McWilliams' task was made more difficult because there was no money to pay outside forensic companies or even former Synaps employees to help. Synapse fired its last employees on May 24.

However, some customers whose money was kept in banks in so-called demand deposit accounts have already started accessing the accounts, she added.

But users whose funds are pooled in a group method known as benevolent accounts, or FBO, will have a more difficult time getting their money. She said the full reconciliation would take more weeks to complete.

In her filing, McWilliams presented several options for Judge Martin Barash to consider at Friday's hearing that would allow at least some FBO clients to regain access to their funds.

Options include full payment for some customers, with delayed payments for others, depending on whether individual FBO accounts have been settled. Another option is to distribute the deficit evenly among all customers to free up limited funds sooner.

At the start of the public hearing on Friday, McWilliams told Barash that her recommendation was for all FBO clients to receive partial payments, which would “partially mitigate the impacts on end users who are currently waiting to be blocked from accessing their funds” while keeping a reserve account for subsequent payments.

But Barash's comments cast doubt on how to proceed.

While the judge thanked McWilliams profusely for her work, he said he was “struggling” with “what I can do, how I can help.”

The case is “uncharted territory” and because depositors’ money did not belong to Synapse, Barash said it was not clear what the bankruptcy court could do.

“This is a crisis, and I would like to see a solution, but I'm not sure if people are looking for court orders, and what I can offer in terms of court orders,” Barash said.