Synapse bankruptcy dismissed, CFPB may start paying victims

• Key insight: The Synapse bankruptcy dismissal raises questions about whether and when victims will be reimbursed.
• Supporting data: The CFPB Civil Penalty Fund balance is $118.9 million.
• Forward look: Industry observers and victims are watching to see what the CFPB does.

Source: Bullets generated by AI with editorial review

Martin Barash, the judge in Synapse Financial Technologies' bankruptcy, has dismissed the Chapter 11 case, in response to a motion from bankruptcy trustee Jelena McWilliams, who had asked that the case be either dismissed or converted from Chapter 11 to Chapter 7.

Synapse, a Silicon Valley startup, connected fintechs with banks and provided ledgers that were supposed to track all transactions going back and forth between them. When Synapse went bankrupt in April 2024, bankruptcy trustee and former Federal Deposit Insurance Corp. Chair Jelena McWilliams found that up to $95 million of customer funds were missing. Since then, Synapse's partner banks — Evolve, Lineage, AMG National Trust and American — have analyzed their records and returned some money to these end customers. 

Evolve has accused Synapse of keeping inconsistent records and producing inaccurate statements; it's accused the other partner banks of not providing requested information. Likewise, Lineage, AMG National Trust and American have accused Evolve of failing to provide records. Yotta has accused Evolve of running a Ponzi scheme. These lawsuits are ongoing.

In August, the Consumer Financial Protection Bureau filed a complaint and an order against Synapse, saying the company "engaged in unfair acts or practices by failing to maintain adequate records of the location of consumers' funds and failing to ensure those records matched the records maintained by the Partner Banks." It fined Synapse's estate $1, a prerequisite for using its Civil Penalty Fund to reimburse Synapse end users. According to the CFPB's latest financial report, its Civil Penalty Fund has an unallocated balance of $118.9 million.

Asked on Friday if the CFPB will make payouts to victims, a spokeswoman said, "We said we were months ago."

But some observers wondered if the dismissal of the case means the CFPB won't refund victims the way it offered this summer.

"It is surprising and somewhat concerning to see the Synapse bankruptcy terminated before the CFPB takes concrete action to reimburse fintech customers from its victims' fund, especially since threats to the agency's existence and funding continue to be made by the people placed in charge of its future by the administration," said Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business and Law Schools. "It would be very bad politics for the CFPB to back out now, and we can all hope that this is just a procedural delay rather than a change of heart at the agency."

In his order this week, Judge Barash also approved McWilliams' request for exculpation for herself and her colleagues at Cravath, Swaine & Moore. In her motion, McWilliams said she and her colleagues "have worked diligently during the course of the Case to achieve the objectives of this Court, including returning funds to End Users, exploring the sale of assets and finding an efficient resolution to this Case … despite the inability of the estate to compensate the Exculpated Parties for any services rendered."

The judge further authorized McWilliams to destroy the remaining records and data for privacy reasons, another thing she asked for in her motion.