A fintech ensnared in the fallout of bankrupt Synapse Financial has sued its bank partner, Evolve Bank & Trust, for allegedly stealing and misappropriating customer funds.
Yotta Technologies, a savings gamification app, claimed in court documents filed Sept. 13 that Evolve “utterly failed in its most basic duty to its customers” by misappropriating or misplacing tens of millions of dollars in customer funds, and that Evolve’s illegal behavior began “long prior” to the collapse of Synapse in April.
Synapse, a middleware company, acted as an intermediary between Evolve and Yotta, as it did between Evolve and other fintechs.
Citing its own investigation, Yotta claims that Evolve and Synapse “conspired to simply take” millions of dollars from Yotta customers.
“Evolve debited customer accounts for over $25 million according to Synapse’s records. These transactions were never authorized by customers,” who were never informed of such transactions, Yotta wrote in court documents.
Additionally, alongside Synapse, Evolve “inflated the account balances that they reported to Yotta and its customers to make it appear as if the misappropriated funds remained in customers’ accounts,” Yotta alleges.
One month after Synapse’s bankruptcy filing, Evolve froze access to Yotta customers’ accounts, providing no notice to Yotta or its customers ahead of time and blaming the freezing on Synapse “turning off system access for Evolve.”
This was a misrepresentation, alleged Yotta: “Evolve had known for quite a while that it had taken Yotta customer funds and that it had breached the ‘integrity and security’ of those funds.”
“Evolve also acknowledges – but does not explain – that a substantial amount of customer money is missing,” Yotta added.
Yotta customers haven’t had access to their money – totaling more than $100 million – since Evolve froze Yotta accounts in May, Yotta has said. Some customers, turning to others on the /yotta subreddit, are grappling with the loss of their life savings and struggling to pay their bills.
“If [Yotta] had known that [Evolve] was a dishonest and incompetent bank that could not perform the most basic job of a financial institution (i.e. keeping track of customer money) it would have immediately ceased all business with [Evolve] and taken steps to ensure that customer funds were immediately returned,” Yotta said in its lawsuit.
Evolve did not respond to multiple requests for comment.
Sankaet Pathak, founder and CEO of Synapse, directed Banking Dive to a series of social media posts he made regarding “Evolve’s Technology Issues (with receipts)” beginning Aug. 20.
Pathak alleges that Evolve’s core system is outdated and “almost impossible to integrate with,” and that Evolve’s management worked hard to hide, rather than address, the issues. These technology issues resulted in problems including daily balance fluctuations, inaccurate statements and unresolved check reconciliation issues.
“Evolve’s broken tech and failure to manage these issues make it irresponsible for them to continue operating as they are,” Pathak wrote.
In the days since Yotta filed its lawsuit against Evolve, the Federal Deposit Insurance Corp. has proposed a rule that would strengthen recordkeeping requirements for bank deposits held by third parties.
The rule “is an important step to ensure that banks know the actual owner of deposits placed in a bank by a third party such as Synapse, whether the deposit has actually been placed in the banks, and that the banks are able to provide the depositor their funds even if the third party fails,” FDIC Chair Martin Gruenberg said in a prepared statement.
“In addition, it will strengthen the FDIC’s ability to make deposit insurance determinations and, if necessary, pay deposit insurance if the bank fails,” he said.
The proposed rule also provides for oversight by the banks’ primary federal regulator to review for, and compel, compliance with the rule.
A public comment period on the proposal will be open for the next 60 days.
