Synapse’s four partner banks have been sued over alleged mishandling of customer funds in the ongoing fallout since the fintech’s collapse. 

American Bank, AMG National Trust, Lineage Bank and Evolve Bank & Trust were hit with a lawsuit seeking class action status in a federal court in Colorado Friday.

Evolve’s parent company, Evolve Bancorp, was also named in the lawsuit.

The plaintiffs named in the lawsuit are primarily customers of consumer-facing fintechs Yotta or Juno, who created accounts on the fintechs’ platforms and initiated cash deposits. Customer funds were maintained at one or more of the four partner banks, which involved Synapse, a middleware provider, to open deposit accounts, process transactions, and manage account ledgers. That led to a “gross mismanagement of cash deposits of ordinary consumers who have lost access to their holdings” following Synapse’s bankruptcy, the lawsuit noted. 

“Unfortunately, the Partner Banks failed to adequately maintain and safeguard customers’ funds,” the complaint said.

It’s not the first time Evolve has been sued related to Synapse ledger issues. Yotta sued Evolve in September, claiming that the lender “utterly” failed in its most basic duty to its customers by misplacing tens of millions of dollars in customer funds. 

Most end-user funds were held in omnibus for-benefit-of accounts; the rest was held in demand deposit accounts across the four partner banks. Synapse combined transaction data from partner banks with its customer data and delivered this consolidated data to fintechs — creating an ecosystem where fintechs, partner banks, and Synapse were interdependent in tracking and accounting for user funds, the lawsuit highlighted. 

However, when Synapse filed for Chapter 11 bankruptcy on April 20, it was revealed that roughly $85 million in funds belonging to about 100,000 customers could not be traced due to irregularities in ledgers, which led to incorrect fund balances, according to the lawsuit.

A report by law firm Troutman Pepper, published last month, tracked the shortfall at between $65 million and $95 million. 

“We are glad that Evolve was not singled out for this action,” an Evolve spokesperson told Banking Dive via email, referring to the latest lawsuit.

Following the collapse of Synapse, the partner banks struggled to reconcile missing customer funds after discovering “significant ledger irregularities” and blamed each other for being unable to reconcile missing user funds fully, the lawsuit contends. The banks asserted that all funds held at the respective partner banks had been distributed, according to the lawsuit.

“It has been a long road for everyone involved, but the right road, and we are proud to have completed this exhaustive reconciliation process, which we believe was the responsible course of action to properly return end user funds,” the Evolve spokesperson said. 

Last month, Evolve said it was preparing to disburse roughly $46 million belonging to Synapse end users. In an open letter to Synapse end users, published Wednesday, Evolve noted that many end users have already received the payment through digital banking or opted for an alternate payment method to receive more than $24.5 million in funds, while it continues to navigate the challenging situation.

However, as Evolve has reconciled accounts, some consumers have been underwhelmed by the payouts. 

Evolve claimed it held smaller amounts than what was quoted in Synapse’s ledger for many end users. Thereby, it paid less to those users and pointed to the other partner banks for the missing funds, the lawsuit said.

AMG and Lineage, for their part, denied that they held “substantial additional funds” belonging to fintech users. AMG claimed to have distributed more than 99% of funds to fintech users, according to the complaint. 

Lineage, for its part, told Banking Dive via email that it would continue to return end-user funds in its possession to the rightful owners, adding that it has “already dispersed over 90% of the Synapse funds it held for the benefit of Synapse’s users.”

Lineage further said that it is aware of the recently filed lawsuit, but it is against the lender’s policy to comment on pending litigation. 

Attempts to reach AMG and American Bank by press time were unsuccessful.

“The result is that many customers are left without access to their cash deposits and with no clear ability to discern which of the Partner Banks holds their money,” the lawsuit said. “But their money is necessarily held by one or more of the Partner Banks.”

The banks lacked contingency plans or proper risk management practices in the event of operational issues at Synapse or its failure, which left the banks unable to process accounts worth more than $250 million, according to the lawsuit.

Soon after Synapse filed for bankruptcy, Evolve was hit with a Federal Reserve enforcement action. The order was based on an examination carried out at the bank in early 2023 – highlighting that Evolve was aware of its operational and compliance issues for at least a year before the bankruptcy filing, the lawsuit said. 

Meanwhile, Lineage entered a consent order with the Federal Deposit Insurance Corp. in January. Though the order did not specify the timing of the exam, it pointed to compliance issues that the lender was aware of before Synapse’s collapse.

“The Partner Banks’ lack of direct bank access to Synapse’s ledger, lack of contingency planning, and failure to maintain their own copy of the ledger all contributed to their respective failures to fulfill the most fundamental responsibility in banking: to keep track of the money,” the lawsuit asserted. 

The plaintiffs suing the banks individually and on behalf of the proposed class are seeking restitution and equitable relief, disgorgement of funds, an injunction to stop the defendants' alleged harmful business practices, economic and compensatory damages, attorneys' fees and legal expenses, pre- and post-judgment interest and any additional relief the court deems appropriate.

Evolve worked with Ankura, a third-party firm, to sort out the reconciliation process. 

With that complete, “we have again offered to coordinate with other banks to share transaction data, enabling them to reconstruct end-user balances using reliable information—not the flawed Synapse data—and accurately return funds to end users,” the Evolve spokesperson said.