In the latest development in Yotta's lawsuit against Evolve Bank, the savings app provider has filed a fiery amended complaint to answer Evolve's motion to dismiss.
"This is a case about a bank that utterly failed in its most basic duties to its customers by misappropriating tens of millions of dollars in customer funds, lying in order to cover up its malfeasance, and running a Ponzi scheme," the new complaint states. Evolve Bank did not immediately respond to a request for comment.
In Yotta's original complaint, filed in September 2024, it said Evolve misappropriated or misplaced customer funds. But it did not accuse it of running a Ponzi scheme or of lying about it.
Yotta believes that Evolve's actions when migrating another fintech, Mercury, from a direct relationship with banking-as-a-service provider Synapse to a direct relationship with Evolve was in effect a Ponzi scheme, according to a person familiar with the matter. "They knew there was a shortfall, they took from smaller customers to make Mercury whole — their most important customer. If there was a shortfall, how could they move Mercury off without stealing from everyone else?"
The case centers around Synapse, a Silicon Valley startup that connected fintechs that can't offer bank services such as FDIC-insured deposit accounts with banks that can. Synapse provided software and services such as shared ledgers showing fintechs' end users' account transactions and balances at partner banks. Yotta had an agreement with Synapse; Synapse worked with Evolve and several other banks.
When Synapse went bankrupt in April 2024, bankruptcy trustee Jelena McWilliams found that somewhere between $65 million and $95 million in customer funds was missing. This means that
New York-based Yotta and Synapse have said Evolve misappropriated customer funds. Evolve has said
Industry observers say there is blame to go around.
"While I believe Synapse and Yotta itself bear culpability, it is Evolve alone that bears accountability because it is the regulated entity," Jason Henrichs, CEO of Alloy Labs, a consortium of midsize and community banks. The other banks Synapse worked with have less responsibility because Yotta's card was issued by Evolve, he said.
Yotta's case does have merit, in Henrichs' view. "I think it is a pretty strong case, but ultimately I think Yotta is responsible for its customers and the claims it made about FDIC insurance," he said.
What's in Yotta's new complaint against Evolve Bank
Yotta's amended complaint claims that Evolve stole over $75 million from its customers and concealed this theft through misleading practices.
"Where did the money go? Yotta's investigation indicates that Evolve simply stole it," the complaint states. "In violation of its representations to Yotta and end users, responsible banking practices, and basic morality, Evolve stole more than $75 million from end users."
Before Synapse's collapse, Evolve debited Synapse's customer accounts for more than $25 million, according to Synapse's records, Yotta's complaint states.
A Northern California judge has ruled that Yotta must specify Synapse's role in alleged fraud, as well as details of the fraud.
"These transactions were never authorized by customers," the complaint says. "Evolve had no right to take this money from customers and never informed Yotta or its customers that it was doing so. ... They also 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."
These debits appear to be the fees Evolve charged Synapse for its services (it called these account analysis charges) and for payment processing conducted by a third party, TabaPay. Evolve does not deny that it charged Synapse millions of dollars in fees for its own and TabaPay's services. An Evolve spokesman has said
In the new complaint, Yotta also repeated its accusation that Evolve misappropriated almost $50 million in customer money in connection with migrating another fintech company, Mercury, from Synapse's software to Evolve's software in October 2023. According to Yotta's complaint, Evolve's September 2023 correspondence with Synapse shows the bank knew there was a deficit in all fintech accounts that connected to Evolve through Synapse.
"As a result, before Evolve migrated Mercury's funds, it was perfectly aware that the FBO accounts did not have sufficient funds to migrate all of the funds that were supposed to be in Mercury end users' accounts," the complaint states. Mercury leaders have said they have investigated and found no evidence of malfeasance or fraud.
Evolve's alleged misconduct has decimated Yotta's business, according to the complaint. Yotta had brought more than 100,000 customers to Evolve and spent more than $20 million persuading end users to open Evolve bank accounts and deposit funds there, the complaint states.
"Evolve's conduct caused Yotta's business to lose essentially all value," the complaint states. "Yotta's customers are rightly enraged at the loss of their funds. Many remain unwilling to use Yotta's services going forward. Yotta's reputation in the market, once sterling, has been tarnished, potentially beyond repair. Yotta's banking-related revenues have evaporated and the enterprise value of its banking business, once substantial, has dwindled down to nearly nothing."
Yotta is asking for damages, litigation costs and "any further relief deemed appropriate."
"The amended complaint contains the kind of detail about specific Yotta interactions with Evolve personnel that the judge found lacking in the original complaint," Todd H. Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business and Law Schools, told American Banker. "It stands a good chance of surviving a subsequent motion to dismiss by Evolve."
Because of the tri-party nature of the dispute, in order to prove its case against Evolve, it is critical for Yotta to get discovery of all the communications and transactions between Synapse, Evolve and other parties (such as Mercury) during Yotta's relationship with Synapse and Evolve, he said.
"Only then will [Yotta] be able to allege where the money that it believed was being held for Yotta customers ended up," Baker said. "It hopes that the answer isn't 'Synapse,' as there is no money there. If it can prove that Evolve or someone like Mercury ended up with Yotta customer funds, it has a shot at recovering them."
