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Comment by dexter0 | Hacker News Reader

> In the immediate aftermath of Synapse's bankruptcy, which happened after an exodus of its fintech clients, a court-appointed trustee found that up to $96 million of customer funds was missing. The mystery of where those funds are hasn't been solved, despite six months of court-mediated efforts between the four banks involved.

This is the real question.

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Personally I think the real question is why a robber that stole $500 from a bank teller drawer and anyone that helped them gets thrown in prison without any meaningful consideration of their circumstances while these besuited lowlifes get to go home to their families every night while they decide amongst themselves whether they can figure out who is responsible for destroying thousands of people’s lives.

I don't want to go out of my way to defend their incompetence, but you have to prove what happened. It's not fair to send a CEO to prison because a different insider independently embezzled funds and they lost the records.

It depends. SOX compliance, if they were, actually literally does say the CFO and other officers who signed off on their accounting are liable. That’s the point of SOX. Synapse itself likely wasn’t unless it was preparing for IPO but their banking partners might be.

Their primary partner Evolve bank is not, but it is held to legal standards by the FDIC and other banking regulators and their lack of controls is probably where you might see executive management facing criminal challenges.

However everyone involved could face civil penalties.

If history had been different it’s likely this event would have turned up regulatory scrutiny on fintech precisely for these reasons - a privately held fintech can basically just fuck around and pretend to be a bank leveraging a poorly managed licensed partner holding the risk and abscond through incompetence with everyone’s money and no one suffer a consequence other than the customers. Sadly I don’t expect this to change in the next four years and there’s every reason to believe accountability will get worse as existing regulations and enforcement are potentially gutted. So caveat emptor is likely the law of the land until something so huge happens it can’t be ignored.

Seems like a rather large moral hazard if we don't?

At some point the courts should be able to say "ok fine you were the directors responsible for the company you're going to prison n years, sorry."

Bet we'd see a lot more documentation suddenly appear.

But think of the innovation we'd lose out on by jailing executives doing this. A bank that gives sub-market interest and "invests" part of the difference in a scratcher game that they run. Oh, and for complex legal reasons, they're not a bank, but they do offer bank accounts at a different bank.

I think you're absolutely on-point. There's literally no end to the amount of money they could innovate for themselves if we'd just let them do whatever the hell they want and then claim it's too confusing to figure out what happened when they steal it all. Won't someone think of the innovators?!

I'd bet 95% of fintech startups are just walking moral hazards to begin with.

> Seems like a rather large moral hazard if we don't

Based on what? The catastrophic failure rate is low. And if you’re sensitive to that risk, don’t bank with a firm that’s selling you on sticking it to the man or whatever.

Command responsibility applies here. CEOs get multiple times their average employee's pay because of their responsibility, which should include responsibility to know when stuff goes wrong.

You have to prove the bank robber did it too? Why is it that we wiretap phones, subpoena companies, search homes and detain people for the lowest of drug crimes but everyone throws their hands up here?

Like, how did you expect to make a case if you don't do anything?

If you're a CEO running a business that sells what they call 'savings accounts' worth hundreds of millions of dollars and even have a system in place where it's even possible to make "'very large bulk transfers' of funds without identification of who owned the money" then you should be responsible for that. There's a good reason this doesn't happen at banks-- it can't. They have redundant business processes in place that prevent it from happening in the first place, and are constantly redundantly reconciling their transactions so if it does happen, it gets caught and corrected immediately. Not only did it happen, it happened without being able to figure out where the money even went.

Let's say I ran a company that made a product that I acknowledged is extremely dangerous without this one safety mechanism. Instead of creating multiple redundant systems to ensure that safety mechanism is in place, I just trust that some guy takes care of it without being absolutely certain-- it's expensive, annoying time consuming, blah blah blah. When a bunch of people get hurt because that guy pocketed the cash that was supposed to go towards that safety feature, hell yes I should be criminally responsible. It's negligence.

> Personally I think the real question is why a robber that stole $500 from a bank teller drawer and anyone that helped them gets thrown in prison without any meaningful consideration of their circumstances

Because if you allow it, you'll have hundreds of these everyday. The law is there to "scare" others from doing it not punish the perpetrator. On the other hand, you don't have hundreds of fintech startups raising millions every day.

It makes no sense to throw someone in prison in this case unless they are a flight risk until their sentencing is complete.

>Because if you allow it, you'll have hundreds of these everyday. The law is there to "scare" others from doing it not punish the perpetrator. On the other hand, you don't have hundreds of fintech startups raising millions >every day.

Surely the scale of harm caused is the metric here, and not the frequency of potential crimes individually committed

Sentencing? Who’s been charged? The article implied that regulatory bodies haven’t even raised an eyebrow— the parties are in mediation and synapse said they don’t even have enough money to audit their books, and are just sort of shrugging their shoulders about it. And doesn’t white collar crime need to be discouraged too? Probably even more so considering the scale of the impact? Hundreds of millions of dollars, uninsured. Maybe if the cops went around major metropolitan business districts frisking every middle aged person in upscale business casual attire with an expensive haircut to search for wire transfer receipts because they ‘met the description’ then extremely consequential white collar crime would be less frequent than it is.

For $96 million, I would be a flight risk.

In hindsight the fact that these neobanks can advertise their customers' funds are FDIC-insured is crazy. If I run a ponzi scheme but deposit my victims' money at Chase, does that mean I can correctly claim the funds are FDIC-insured?

I think the FDIC insurance is per account at a bank with a banking charter. Fintechs are typically given one account by a real bank and so funds are commingled but also it is a single account so only 85k insuran ce even though the account might have 1000s customer funds commingled.

This is not true for fiduciary accounts, which are covered per principal. So FDIC coverage should extend to all customers if the account was properly declared.

This isn’t accurate. A fintech’s own money (as opposed to customer funds) may have low insurance. But if set up properly, those customer funds can have pass through FDIC insurance. See https://www.fdic.gov/financial-institution-employees-guide-d...

However this apparently doesn’t protect you from the failure of the third party, which is what is unexpected. If you look at this bulletin the FDIC put out after the Synapse incident, they’re basically claiming they aren’t stepping in because a bank hasn’t failed. A fintech that isn’t the bank, but has records of what’s at the bank, failed.

https://www.fdic.gov/consumer-resource-center/2024-06/bankin...

Personally, I find the explanation to be pretty weak - what does pass through insurance even mean then? Does every fintech startup need to also directly be a bank - if so that’s a huge barrier to entry and basically gifts incumbents with regulatory capture. If the money is in an FDIC protected account, it should be safe. It does not make sense to me that they would step in for Silicon Valley Bank’s failure, but not in this situation.

One weird part of the situation is that it seems the underlying bank does not have records about each customer and their numbers. To me that seems negligent on the part of the underlying bank. Surely they knew about this arrangement of pass through insurance and the need to protect funds. They should have maintained separate accounts for each client of the third party service. Regardless of negligence it seems the FDIC is trying to make this record keeping a requirement: https://www.fdic.gov/news/press-releases/2024/fdic-proposes-...

I mean the FDIC is an insurance program, if it extends insurance to entities that haven't bought in their risk profile changes.

I agree. But I think the issue is that the FDIC is providing pass through insurance but also now clarifying in an unexpected way, that only failures of the underlying bank trigger insurance coverage. It may be technically right but it has many implications that are negative. To the everyday person it’s also perverse that highly connected rich people, like VCs tied to SVB, can get their money protected beyond any insurance limit based on their power, but poor individuals just have zero influence.

That's not true in the US generally (FDIC "pass-through insurance" is a thing).

The problem here wasn't a lack of FDIC insurance, but rather a lack of record keeping that allowed attribution of insured balances to individual beneficiary account holders.

That's batshit insane.

The whole point of banking that people have forgotten is trust.

Large banks have gone to great lengths to teach people that banks can never be trusted

I trust them a whole lot more than any random fintech company. At least with traditional banks, there is some amount of protection available.

Put differently:

Less than zero: trust to place in random fintech company

Zero: trust to place in random bank

Very low value: trust to place in a carefully selected bank

Moderate value: trust to place in FDIC

There's generally nothing stopping scammers from lying in ads. Enforcement is only done afterwards.

The fact that any bank would advertise "FDIC insured" is silly, as it conditions potential customers to look to the banks for this information. It would be better if folks were conditioned to consult only the FDIC themselves for this information.

It should be a protected term in advertising. As soon as you use it, you surrender yourself to FDIC auditors.

It serves the same purpose as asking customers "are you a terrorist" -- it creates an easily prosecutable offence.

Could you expand on why is it easily prosecutable?

I sense that it has something to do with lying in documents.

But hypothetically: if I write “no”. Proof of lying requires proof of terrorism. (At which point you did all the job of proving terorism, despite the document)

If you ask it online then I guess it counts as wire fraud which may be easier to prosecute.

Is terrorism not already an easily prosecutable offense?

How is this possible in USA?

Decades of deregulation. More to come.

What specific regulation would have prevented this? Or is this just a knee jerk response against "deregulation"?

the one simple one I can think of would be to specifically make depositor acknowledge “hey this is not FDIC ensured, do you want to proceed?”

probably still some percentage of people would fall for it and continue with the creation of an account but at least then this discussion here would be “stupid is as stupid does.”

One could make a regulation that account data cannot be lumped.

Sounding edgy doesn't really mask the fact you have no idea what you're talking about. See https://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street... for example

You clearly do not know a single real thing about America. America itself is a con job from to back, to to bottom, left to right. Between the reserve currency global fraud, the inflation money printing, the scam startups, the deficit spending and national debt fraud, the various banking and financial frauds, even our children are raised with fraudulent schemes with things like the “fundraising” through selling Girl Scout cookies and circulate bars. All the scamming online, in our professional lives, personal lives, or fake religious groups and political entities, is all just snake oil heritage and the rich plundering the country through a fraud based economy.

It’s something that most Europeans that come to America either are shocked by or fall prey to, because not only are laws tighter in Europe regarding fraudulent activities, but in many places of Western Europe, society is still relatively high trust and of good morals and ethics with little of the overt and blatant open scamming and lies you see in America on a daily basis to such a degree that most Americans cannot even see it.

A more apparent example of that is our stores in America that are always having a BIG BIG SALE of up to 80% OFF. When it’s just the same market prices claiming to be 80% discounted from some made up price.

And to add to this, I think it was JC Penny that called this "80% OFF" sale out and stopped doing that. The result, they came very close to Chapter 11. They ended up reversing that policy just to stay in business.

This is just one example of how really stupid the Average American is. The past election also just proved how dumb the average person is in the US.

JC Penney's problems went considerably further than whether they did or did not run an "80% OFF" sale.

True, but the ending of "80% off" style sales was a very visible problem for them.

You mean how could someone possibly send their life savings into some bullshit lotto-ticket-account app? Especially when their interest rate is 20bps more than any real bank.

I don't think it's any different from people learning life lessons from all the crypto 10% weekly return schemes.

Read "A decade of armageddon" or some other good books on how the US markets and banks actually work..

TLDR: financial crime pays in the US.

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