Thousands of Americans see their savings disappear

For 15 years, Kayla Morris, a former school teacher in Texas, put all the money she could save into a house for her growing family.

When she and her husband sold their home last year, they smuggled the proceeds, $282,153.87, into what they thought was a safe haven: an account with savings startup Yotta at a real bank.

Morris, like thousands of other customers caught up in the collapse of a behind-the-scenes fintech company called Synapse, was locked out of her account for six months as of November. She held out hope that her money was still safe. She then learned how much money Evolve Bank and Trust, the lender where her funds were supposed to be held, was prepared to return to her.

“Last Monday, I was informed that Evolve would only pay $500 of the $280,000,” Morris said in a court hearing last week, her voice shaking. “It’s really devastating.”

The crisis began in May when a dispute between Synapse and Evolve Bank over customer balances boiled over and the fintech intermediary cut off access to key systems used to process transactions. Synapse has helped non-bank fintech startups like Yotta and Juno offer checking accounts and debit cards by partnering with small lenders like Evolve.

Shortly after Synapse’s bankruptcy following an exodus of fintech customers, a court-appointed receiver discovered that up to $96 million in customer funds were missing.

The mystery of where these funds are remains unsolved despite six months of court-mediated efforts between the four banks involved. Bankruptcy Trustee Elena McWilliams said the main reason is that Synapse’s Andreessen Horowitz-backed estate doesn’t have the funds to hire an outside firm to do a complete reconciliation of its books. .

But what is now clear is that ordinary Americans like Morris are bearing the brunt of that shortage, and their savings accounts, which they believed were backed by the full faith and credit of the U.S. government. That means you’ll receive little or nothing from your account.

The losses illustrate the risks of a system in which customers had no direct relationship with banks and instead relied on startups to manage their funds, shifting that responsibility to intermediaries like Synapse.

There are thousands of others like Morris. There is still no complete tally of customers left shortchanged, but figures shared by Yotta co-founder and CEO Adam Moelis say there are 13,725 at Yotta alone. of customers said they deposited $64.9 million but were offered a total of $11.8 million.

CNBC spoke to 12 customers who found themselves in this predicament, with debts ranging from $7,000 to well over $200,000.

From FedEx drivers to small business owners, teachers to dentists, they are turning to fintechs like Yotta for higher interest rates and innovative features, or even disconnecting from traditional banks. He said years of savings were lost as a result of the incident.

One of Yotta’s customers, Zach Jacobs, decided to take action when he logged on to Evolve’s website on November 4 and noticed that of the $94,468.92 he deposited, only $128.68 was returned to him. did.

The 37-year-old business owner, based in Tampa, Florida, started organizing with other victims online and created a volunteer committee for a group called Fight For Our Funds. It is his hope that they will receive attention from the media and politicians.

So far, 3,454 people have signed the petition, with a combined loss of $30.4 million.

“When I tell people this, they’re like, ‘That can’t happen,'” Jacobs said. “There just happened to be a bank robbery. This is the first reverse bank robbery in American history.”

Andrew Melone, a chemical engineer from Chicago, said he was hoping to get back the $200,000 he put into Yotta. Earlier this month, he received an unexpected PayPal transfer of $5 from Evolve.

“When I signed up, I was given an Evolve routing and account number,” Meloan said. “Now they’re saying I only have $5 of my money and the rest is elsewhere. I feel like I’ve been scammed.”

Unlike betting on meme stocks or cryptocurrencies, where users naturally assume some risk, most customers consider funds held in Federal Deposit Insurance Corporation-backed accounts to be the safest place to keep their money. I was there. People relied on Synapse-powered accounts for everyday expenses like buying groceries and paying rent, or to save for major life events like buying a home or surgery.

People interviewed by CNBC said signing up seemed like a good bet because Yotta and other fintech companies were advertising that deposits through Evolve were FDIC-insured.

“I was convinced this was just a savings account,” Morris said at last week’s hearing. “We are not risk takers or gamblers.”

The Synapse agreement that customers received after signing up for a checking account stated that their funds would be insured by the FDIC up to $250,000, according to a version seen by CNBC.

“According to the FDIC, no depositor has ever lost a penny of their FDIC-insured funds,” the 26-page agreement states.

Abandoned by U.S. regulators who have so far refused to act, they are left with few clear options to get their money back.

The FDIC said in June that its insurance fund does not cover the failure of nonbanks like Synapse, and there is no guarantee that it will recover funds through the courts if these companies fail.

The following month, the Federal Reserve announced that it would serve as Evolve’s lead federal regulator and monitor the bank’s progress in “returning all customer funds to users.”

“We have a responsibility to ensure that banks operate in a safe and sound manner and comply with applicable laws, including laws that protect consumers,” Mark E. van der Weide, the Federal Reserve’s general counsel, said in the letter. said.

In September, the FDIC proposed new rules that would require banks to keep detailed records about customers of fintech apps, increasing the likelihood that customers would be eligible for compensation in the event of a future disaster and that funds may go missing. reduced the risk of

McWilliams, who served as FDIC chairman during the first Trump administration, told the California judge overseeing the Synapse bankruptcy case last week that he was “disappointed” by the financial regulators’ decision not to support the case. spoke.

The FDIC and the Federal Reserve declined to comment for this story, and Mr. McWilliams did not respond to emails.

Things weren’t always so dire. At the beginning of proceedings, Mr McWilliams suggested to Judge Martin Barash that his clients be awarded partial payments, effectively spreading the pain among everyone.

But that would have required more coordination between Evolve and other lenders holding customer funds than what ultimately happened.

As the hearing dragged on, the other three institutions – AMG National Trust, Lineage Bank and American Bank – began disbursing their holdings, while Evolve struggled to implement what it initially described as a comprehensive settlement. It took several months.

When Evolve completed its efforts in October, it said it was only able to track user funds it held, and did not know the whereabouts of any missing funds. At least some of that was due to “very large bulk transfers” of funds where the owners of the funds were not identified, Evolve’s lawyers testified last week.

As a result, the bankruptcy process revealed relative winners and losers.

Some end users recently received full refunds of their funds, but others, like Indiana FedEx driver Natasha Craft, received nothing, she told CNBC.

As of Nov. 12, the four banks had released $193 million to customers, more than 85% of the amount they had at the beginning of the year.

The Nov. 13 hearing was the only public forum for victims to voice their pain. Dozens of victims lined up in hopes of testifying that they had received a small portion of the money they were owed. The event lasted over 3 hours.

“You can’t imagine the panic I felt when I was told I would receive 81 cents,” said Andreate Caligire, who said he owed $22,000. “I have no money, no path forward, nothing.”

An Evolve spokesperson said the “vast majority” of funds held for Yotta and other customers were transferred to other banks in October and November 2023 at the direction of Synapse.

“Where end-user funds go after that is an important question, and unfortunately, no Evolve company can answer that with the data we currently have,” the spokesperson said.

Yotta said Evolve paid the fintech company and the trustee “despite Evolve’s admission in court that Evolve had shortfalls prior to October 2023,” according to an Evolve spokesperson. He said he did not provide any information about how the amount was determined. I recently quit my job at a bank. “We hope regulators take note and act.”

In a statement released ahead of this month’s hearing, Evolve said other banks had refused to participate in the master ledger effort, while AMG and Lineage said they had the missing funds. He said what Evolve had suggested was “irresponsible and dishonest”.

Barash said last week that the window for cooperation is rapidly closing as banks and other parties hurl accusations at each other and lawsuits mount, including a pending class action lawsuit.

“My impression is that as time goes on, unless the banks involved are able to resolve this issue voluntarily, the issue will not be resolved,” Barash said. “There’s nothing optimistic about what I’m telling you.”