The specter of Synapse’s commingled funds haunts the bankruptcy process

If there is one guarantee in FinTech, and particularly in banking as a service, it is that there will be more regulations.

There is likely to be tighter governance and transparency in the oversight of accounts – in particular, ensuring there is no commingling of funds.

The blurring of lines between where money is moved, where it is held, and who can access the dollars when the funds are withdrawn, ends up being a headache when it comes to tracking fund flows, paying the IRS or make customers whole.

Case in point: as noted in this one send on X (formerly Twitter) from Jason Mikula of FinTech Business Weekly, former CEO of bankrupt Synapse Sakaet Pathak reportedly said during the company’s creditors’ hearing this week that “Synapse may have commingled end-user funds, operating and reserve funds from fintech programs, and Synapse’s own operating funds in FBO accounts at Evolve.”

A tortuous path

Untangling and unfreezing account holders’ assets may become much more complicated.

Like PIMNTI reported On Monday (June 10), during last week’s hearing that highlighted the remarks and strategies of court-appointed trustee Jelena McWilliams in the Bankruptcy Court for the Central District of California, there is a deficit of approximately $85 million and McWilliams said restoring access to customer funds is challenging.

There is no money to get a forensic accountant on the case to track down what happened and reconcile the funds. We noted that Evolve Bank and Trust, one of Synapse’s partner banks, has apparently struggled to reconcile its deposits with Synapse’s proprietary accounting system due to its complexity and lack of experienced staff.

Determine who is owed what

Some future paths have already been proposed, including a scenario where assets held in the designated “for the benefit of” (FBO) Synapse Brokerage account could potentially be consolidated into a single account, with the appointed trustee and supervising court determining the appropriate disbursement amounts to each individual end user.

But if there has been commingling, as suggested above, the waters are a bit muddy in terms of what will be disbursed and to what appropriate party.

The rise of FinTech services companies has been meteoric, but in at least some cases regulators have come knocking. Like PIMNTI reported in September, Solid Financial was accused of falsifying revenue data to woo investors. The company took what it called a “very aggressive” approach to acquiring new customers, without doing its due diligence to vet those customers.

THE Federal Deposit Insurance Corps (FDIC) has also been busy.

The agency has issued several “cease and desist” orders warning of false claims by digital startups that their customer accounts are, in fact, guaranteed by deposit insurance, PYMNTS reported Tuesday (June 11).

The laws are such that businesses are prohibited from “making false or misleading statements about deposit insurance, using the FDIC name or logo in such a way as to imply that an uninsured financial product is insured or guaranteed by the FDIC, or knowingly misrepresenting the scope and method of deposit insurance”. Cease and desist letters have been sent to companies such as Prizepool, AmeriStar and virtual wallet company Organo Payments.

The FDIC earlier this month issued a consumer news bulletin stating that when consumers open accounts through nonbank companies, “it is not always clear to consumers whether they are dealing directly with an FDIC-insured bank or with a non-banking company”.

Funds sent to a non-bank company are not eligible for FDIC insurance “until the company deposits them in an FDIC-insured bank and after other conditions are met,” according to the FDIC. Mixed accounts would make it difficult to know whether individuals’ and businesses’ funds are separated to ensure those funds are insured.

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