Synapse Bankruptcy Dismissal: Questions Surface Over Victim Compensation
The recent dismissal of the Synapse Financial Technologies’ bankruptcy case has raised eyebrows across the finance industry, with queries about the reimbursement of victims taking center stage. The case was dismissed by Judge Martin Barash, in response to a request from bankruptcy trustee Jelena McWilliams. McWilliams, a former Chair of the Federal Deposit Insurance Corp., had petitioned for the case to either be dismissed or converted from Chapter 11 to Chapter 7.
Synapse’s Controversial History
Synapse, a fintech startup based in Silicon Valley, had established itself as a bridge between banks and fintechs. The company provided ledgers that tracked transactions between these entities. However, when Synapse filed for bankruptcy in April 2024, a shocking revelation surfaced: about $95 million of customer funds were unaccounted for. In the aftermath, Synapse’s partner banks, namely Evolve, Lineage, AMG National Trust, and American, scrutinized their records and managed to return some of the missing funds to the end customers.
However, the debacle spiraled into a series of accusations. Evolve accused Synapse of maintaining inconsistent records and producing inaccurate statements, while also accusing the other partner banks of withholding requested information. In response, Lineage, AMG National Trust, and American accused Evolve of the same. Further controversy erupted when Yotta accused Evolve of running a Ponzi scheme. These lawsuits are still ongoing.
CFPB’s Role in the Scenario
In August, the Consumer Financial Protection Bureau (CFPB) filed a complaint and an order against Synapse. The fintech company was accused of engaging in unfair acts or practices by failing to maintain adequate records of consumers’ funds and failing to ensure the accuracy of these records with the partner banks. The CFPB also imposed a symbolic fine of $1 on Synapse’s estate. This move, while seemingly inconsequential, was necessary for the CFPB to utilize its Civil Penalty Fund to reimburse Synapse’s end users.
As per the CFPB’s latest financial report, the Civil Penalty Fund has an unallocated balance of $118.9 million. When asked if the CFPB would reimburse the victims, a spokeswoman stated that they had announced plans to do so months ago. However, with the dismissal of the Synapse case, some industry observers are questioning if the CFPB will follow through with its earlier promises.
Industry Reactions & Predictions
Reacting to the situation, Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business and Law Schools, expressed concern over the dismissal of the Synapse case. He highlighted the potential political repercussions for the CFPB if it fails to reimburse the victims as previously pledged.
Alongside dismissing the case, Judge Barash approved McWilliams’ request for herself and her colleagues at Cravath, Swaine & Moore to be exculpated. McWilliams had argued that she and her team had diligently worked to achieve the Court’s objective of returning funds to end users, exploring asset sales, and efficiently resolving the case. The judge also authorized McWilliams to destroy any remaining records and data for privacy reasons, as requested in her motion.
With the dismissal of the Synapse case and the uncertainty surrounding victim compensation, the industry is attentively observing the CFPB’s next moves. Here is the source link to the original article.
