HESSTON — Brad Heppner’s vision to transform his hometown’s main street into a thriving commercial hub is so breathtaking, local and state officials would rather not question the operations of a uniquely regulated trust company he describes as a pawn shop for rich people.
Few in the Kansas Legislature, or even the investment world, understood Heppner’s business model when lawmakers agreed last year to let him launch the nation’s first technology-enabled fiduciary financial institution — known as a TEFFI — which is operated by his Dallas-based company, Beneficient. Lawmakers and Gov. Laura Kelly continue to support the enterprise despite the Kansas bank commissioner’s concerns, lawsuits that accuse Heppner of fraud, the absence of audited financial statements from Beneficient, and a Securities and Exchange Commission investigation.
A small part of each TEFFI transaction is set aside for rural development, and written off as a tax credit. The program poses a “reputational risk” to Kansas, the bank commissioner says.
Heppner won support for the legislation by promising to bring a grocery store back to Hesston, and that was just the beginning of his plans. In a special city council meeting on Feb. 23, Heppner dared the community of about 3,800 to dream big.
His aspirations now include a hotel, theater, museum, replica flour mill with an observation deck and restaurant, a green space with a chapel, and a new 40,000-square-foot city hall complex.
“It’s up to the community to roll up their sleeves and work with our foundation, work with the Beneficent Heartland Foundation, to make it happen,” Heppner said in an interview with Kansas Reflector in January. “I really want to see it happen quicker rather than later, because my mother’s in her early 80s, and I’d like to see this get done so she can enjoy shopping in that store for a decade.”
Within two years, Heppner predicts, as many as 50 companies eager to operate as a TEFFI could open an office in the town about 40 minutes north of Wichita.
A TEFFI is different from other financial institutions because it only deals in alternative assets, the kind that hold value but don’t produce a regular cash flow, and the legislation requires the bank commissioner to grant a company an operating charter without undergoing the usual examination to determine whether it is safe to do business with the company. There are no deposits in a TEFFI, so it is not FDIC insured.
Rep. Stephen Owens, a Republican from Hesston, touted the new program in an interview with KAKE-TV during an April 2021 news conference.
“The sky is the limit when you’re talking about anywhere from $10 to $100 million, or up to a billion dollars over the next 10 years, flowing directly into rural Kansas,” Owens said. “And folks, this is not Kansans’ money. This is money coming from California, Florida, Hong Kong, Russia, anywhere.”
Beneficient announced in January it had “facilitated” $15 million for rural development in Kansas by setting aside 2.5% of TEFFI transactions, as required by law. So far, less than $1 million in cash has made its way into a charity Heppner created to serve Hesston. Another $2.7 million was delivered Thursday to the Department of Commerce. The rest of the funding may not be available for years.
Senate President Ty Masterson, a Republican from Andover, and Sen. Jeff Longbine, a Republican from Emporia who serves as chairman of the Senate finance committee, insisted in an April 7 letter to the bank commissioner that allegations made in the lawsuits are inconsequential. They demanded the bank commissioner allow Beneficient and the TEFFI program “to proceed as intended.”
A three-month Kansas Reflector investigation explored Heppner’s business and the prospects of rural development through interviews with Beneficient leaders, financial experts, Hesston residents, Texas authorities, attorneys and Kansas officials; a review of legislative hearings and records; financial documents obtained through open records requests and public SEC filings; and documents from lawsuits filed in federal courts and the chancery of Delaware.
“I’ve had many companies bought and sold,” Heppner said in a Jan. 26 interview. “I’ve sold my companies to the biggest banks in the world. And there’s always potholes in business, as every business person knows. And so while we don’t see any now, there’s going to be setbacks, there’s going to be, you know, turns and twists and everything as you go along.”
‘What is the catch?’
The way Heppner tells the story, a phone call from his octogenarian mother convinced him Kansas was the best place to launch his idea for a trust company that deals exclusively with alternative assets.
Heppner, 56, said he spent six years developing the framework for his business by negotiating with Texas regulators. The Texas legislature, however, was too focused on politically charged issues like abortion and voting to consider granting him legal clearance for a novel venture, he said.
South Dakota looked like a promising alternative. Heppner frequently mentions how the state’s lax regulations served as a beacon for credit card companies that now base their operations in Sioux Falls.
Recounting a Saturday morning phone conversation with his mother near the end of 2020, Heppner said he told her he would need to move one-third of his staff from Dallas to Sioux Falls. Instead of shepherding 2.5% of transactions into a research fund for Texas universities, he would move the charitable contributions to South Dakota parks.
“Mom said, ‘I gotta hang up because I got about an hour or two round-trip drive. It’s icy outside. I got to drive to Newton to get groceries — the grocery store, the last one just closed down. Can’t you get me a little bit of that money to reopen the grocery store here in town?’ ” Heppner said. “And that is when the lightbulb went off. And I asked her right there on the call, I said, ‘Mom, can you figure out and get me some meetings set up with legislators to talk about an idea I have?’ And the next step was I actually flew up to Hesston the next day.”
The Dillons grocery store in Newton is 9 miles from his mother’s house near downtown Hesston.
Kansas officials were thrilled by Heppner’s proposal to boost rural development by setting aside a slice of the action from wealthy out-of-state investors through a mechanism that posed no financial risk to the state.
Heppner presented legislation that would allow him to operate a trust company that only deals within a volatile market — providing immediate cash as a loan for high-value assets that aren’t traded publicly and can’t be easily sold. These assets are typically holdings in private equity or venture capital, but also could be investments in private real estate, natural resources or, theoretically, expensive art, antiques and wine.
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House Bill 2074 requires a TEFFI to have at least three employees and 2,000 square feet of office space in Hesston or any town with fewer than 5,000 people in one of 78 Rural Opportunity Zone counties. A TEFFI must designate 2.5% of transactions for charitable contributions. One-fifth of that figure goes to the Department of Commerce while the rest goes to a charity of the TEFFI’s choosing. There is no maximum interest rate for the loans a TEFFI provides in exchange for alternative assets, and the transactions are kept secret.
The banking industry in Kansas didn’t want Heppner to refer to his venture as a “bank” or “trust,” so Heppner settled on “technology-enabled fiduciary financial institution,” even though there appears to be nothing special about the technology involved.
Profitability is not a factor in evaluating the safety and soundness of a TEFFI as long as it has enough money to conduct transactions.
“There is no regulatory authority over it,” Heppner said in the interview with Kansas Reflector. “It’s like the Wild West. It is kind of like — and I hate to use the term because institutions would not like it — it’s like a pawn shop. You’re haggling over how much is my asset worth?”
Individuals and institutions who need cash for their assets could avoid having to worry about paying accountants, lawyers, tax preparers and investment consultants to orchestrate the transaction, Heppner said. They could instead count on the TEFFI to look out for their financial interests. The small percentage they have to surrender for rural development would represent a cost savings. He would only deal with individuals who have a net worth of at least $5 million.
Heppner presented himself as a sixth-generation Kansan and joked that he had to leave Hesston to find a wife because “everybody’s related there.” He talked about his mother’s struggle to get groceries, calling Hesston a “food desert.”
“We think we’ve thought of everything,” Heppner told senators. “The regulator would not need to step in ever and oversee a failing institution.”
Lt. Gov. David Toland, who also serves as commerce secretary, told senators he had the same reaction to Heppner’s pitch as they did: “Sounds amazing, but what is the catch?”
After meeting with Beneficent and others to try to identify a liability to the state, Toland said, “we could not find one.”
A federal class action lawsuit claims Heppner secured cash for Beneficient by defrauding investors.
Heppner’s extensive resume in the finance world includes jobs at Goldman Sachs, the John D. and Catherine T. MacArthur Foundation, and Bain and Company. He has launched numerous businesses of his own, including some based in Bermuda.
Heppner bought Crossroads Group, which managed private equity and venture capital investments, in the mid-1990s, according to a 2018 story in the Dallas Morning News about his niche of providing fast cash for the ultra-wealthy. When Heppner sold Crossroads Group to Lehman Brothers in 2003, five years before the banking titan collapsed, the company managed about $2 billion worth of capital.
Heppner founded Beneficient Management Group in 2003 and Beneficient Holdings in 2010. The new enterprise intersected with Paul Capital Advisors, or PCA, after Fortune Magazine criticized PCA for charging investors millions per year in management fees despite eliminating staff and closing offices while winding down its portfolio. The magazine placed PCA in its Fee Hog Hall of Shame.
Heppner offered a solution. He agreed to find a buyer who would pay $550 million in cash for PCA assets valued at $500 million. That buyer would be GWG Holdings, a Minneapolis-based company that bought life insurance policies from senior citizens. A federal lawsuit filed on Dec. 23, 2021, against GWG Holdings describes a “scheme” in which the company gambled on when people would die. The idea was to give seniors instant cash and take over their premium payments in exchange for later collecting on the policy.
According to legal documents, Heppner placed PCA holdings in a trust managed by one of his employees. The trust manager held a fiduciary responsibility to represent PCA’s best interests but instead, the lawsuit claims, repeatedly altered the terms of the sale. PCA only received about $150 million in cash after years of wrangling.
In the meantime, GWG Holdings agreed to purchase a majority stake in Beneficient. The $800 million deal coincided with the unexplained resignation of the entire GWG Holdings board, leaving Heppner in charge of both companies.
Kenneth Kriz, director of the Institute for Illinois Public Finance and a distinguished professor of public administration at the University of Illinois at Springfield, described the takeover as a “reverse merger.”
“GWG might have known that they had some upcoming legal issues to deal with, and so one of the ways to inoculate yourself is to have your board go away, and you basically get swallowed up,” Kriz said. “So maybe Beneficient was their shield from litigation.”
The maneuver attracted the attention of the SEC, which issued a flurry of subpoenas beginning in October 2020.
A class action federal lawsuit filed Feb. 18 accuses Heppner of unloading $350 million worth of bonds secured by GWG Holdings and sweeping the cash to Beneficient before disclosing the SEC investigation in November 2021. By then, the Kansas Legislature had already passed the TEFFI legislation.
Heppner also severed ties between the two companies, leaving GWG Holdings insolvent and investors holding worthless bonds. GWG Holdings filed for bankruptcy on Wednesday.
A separate lawsuit filed March 4 by PCA in the chancery of Delaware accuses Heppner of failing to deliver all of the cash he promised.
Beneficient declined to answer questions about the litigation.
‘He who has the money’
Kansas bank commissioner David Herndon appeared before the Senate Financial Institutions and Insurance Committee on March 30, 2021, a day after Heppner testified, to outline “unresolved concerns.”
“Neither our office, nor others in the bank and trust regulatory industry that we have consulted, fully understand the business model used here,” Herndon said.
The legislation blocks regulators from examining a TEFFI’s profitability. Heppner’s company wouldn’t have to operate under typical rules for conflicts of interest or use standard accounting practices.
Additionally, Herndon had discovered Beneficient’s parent company, GWG Holdings, had an F rating from Charles Schwab. There were questions about corporate structure and whether Beneficient could provide an audited financial statement.
It wasn’t clear, Herndon said, whether he would have the authority to close the business, as he does with other financial institutions.
“To us, this approach indicates an experimental concept, which raises concerns for any financial regulator where conservative, prudent measures are generally followed, and it most certainly accents the reputational risk to Kansas,” Herndon told senators.
Much of the discussion among legislators that followed Herndon’s testimony focused on whose constituents would be eligible to receive a portion of the charitable contributions from Heppner’s enterprise and other companies that would surely follow. The committee then passed the legislation.
When Longbine, the finance committee chairman, explained the TEFFI program in a March 31, 2021, meeting of Senate Republicans, which a Kansas Reflector reporter attended and recorded, his colleagues wanted to know why the pilot program would be based in Hesston.
Longbine’s simple explanation was met with laughter: That’s where mom lives.
“It’s kind of one of those deals: He who has the money makes the rules,” Longbine said.
In the final days of the session, the House and Senate gutted an unrelated bill, replaced it with the contents of the TEFFI bill, and forced a vote amid a torrent of other last-minute legislation that was up for consideration.
The TEFFI bill passed the Senate by a 39-0 vote but met some resistance in the House.
Rep. Jim Kelly, a Republican from Independence and chairman of the House Financial Institutions and Rural Development Committee, tried to ease the concerns of lawmakers who were confused by the legislation.
“I’ve spent 50 years working for financial institutions, and when I read the bill, I did not understand it,” Kelly said as he urged others to vote in favor of the bill.
Rep. Rui Xu, a Democrat from Westwood, said this was a rare chance for Kansas to be the first state in the country to do something.
“I’ve spent the last two months trying to find a reason to hate this bill, but really it represents very little financial risk to the state of Kansas,” Xu said. “And again, this is cutting edge. That comes with a certain degree of uncertainty. I get that.”
The only lawmaker who strongly objected to the legislation was Rep. John Carmichael, a Wichita Democrat who scoffed at the “beautifully printed, glossy, heavy stock paper” brochure he found on his desk that morning, prepared by “something called Ben.” He pointed out that the 2.5% contribution to rural development could be written off as a tax break by the asset holders.
Carmichael also recalled a lesson instilled by his father: “Don’t put yourself in the position to be the guinea pig.”
“These ideas go south more often than they come to fruition,” Carmichael said. “We are taking a big risk with taxpayer money, handing out tax credits and having the whole show run by a single company.”
The House passed the bill by a 103-20 vote.
Heppner in the January interview with Kansas Reflector said the Texas bank commissioner learned about the TEFFI legislation on the day the Kansas governor signed the bill. The commissioner expressed his disappointment for missing out on such a lucrative opportunity, Heppner said.
“I’m not sure that’s a correct statement,” said Dan Frasier, director of bank and trust supervision for the Texas Department of Banking, in an interview with Kansas Reflector.
Texas records show Heppner submitted and withdrew a series of applications for a trust company between Sept. 25, 2018, and Nov. 25, 2020. Frasier said the ability to provide audited financial statements is “certainly one of the things that we look at and consider as part of the chartering process.”
‘Full speed ahead’
Herndon renewed his concerns in a four-page letter on April 10, 2022, to members of a joint legislative committee established to provide oversight of the TEFFI program.
The letter said the bank commissioner still hasn’t received audited financial records from Beneficient; the location of charitable contributions appears to be a mystery; allegations in lawsuits of fraud and misrepresentation are alarming; and the exact relationship between Beneficient and GWG Holdings has never been made clear.
In a separate email to Sen. Tom Holland, a Democrat from Baldwin City who has called for an end to the TEFFI program, Herndon said the legislation doesn’t allow him to suspend operations.
“It appears to me the ball remains in the Legislature’s court,” Herndon said in the email.
Holland, in an interview, pointed to a Dec. 7 meeting of the oversight committee, where Republican legislators insisted Herndon grant a full charter to Beneficient without further delay.
In that meeting, Herndon objected to authorizing transactions before reviewing audited financial records from Beneficient. Heppner described it as a chicken-and-egg scenario: Beneficient couldn’t close the books until TEFFI transactions were processed, and those transactions were contingent upon having a charter from the bank commissioner.
Heppner said it would just take a couple of footnotes to finalize the financial records.
Masterson, the Senate president, and Owens, the representative from Hesston, balked at Herndon’s concerns about damaging the reputation of the bank commission or the state of Kansas. Owens accused Herndon of standing in the way of a potentially $9 trillion industry.
“Anybody that has done anything great in the history of this world has taken risk — in most cases, much more than just reputational risk — in moving first, in being ahead of the competition,” Owens said. “They’re taking much more enormous risk in the decisions they’re making, well above and beyond simply reputational risk. And I’m incredibly comfortable staking my reputation on the line in taking that risk.”
Herndon’s office authorized the TEFFI’s operations on Dec. 31, complying with a directive from the oversight committee to take action before the end of the calendar year.
“The Legislature should have known better when he told them on Dec. 7 that he still had not received audited financial statements,” Holland said. “They should have said, ‘Whoa, time out, stop the presses.’ But no, that wasn’t good enough for Heppner, and Masterson was like, ‘Full speed ahead.’ And Owens was the same way.”
Beneficient handled $357 million in transactions for assets on Dec. 31, Heppner said in the interview with Kansas Reflector.
‘Stand by and watch’
Hesston city manager Gary Emry said he doesn’t even know what an alternative asset is, and that he isn’t interested in reading about the lawsuits involving Heppner and his companies.
He just wants the grocery store.
In an April 7 interview in his office in downtown Hesston, Emry said he has “a fairly good pulse on the community fabric,” and residents of the town only have good things to say about their native son.
“Stand by and watch,” Emry said. “There’s been an awful lot of talk about a grocery store, OK? And I believe it’s going to happen, and I believe it’s going to happen within the next 18 to 24 months, maybe sooner. But there are some components that have to be put together first.”
At the time of the interview, the Beneficient Heartland Foundation hadn’t received any money from the TEFFI. Beneficient responded to questions about the funding by providing a bank statement showing a $748,339.44 transfer was made to the foundation on April 8.
Legislators who touted the rural development aspect of the TEFFI never mentioned that Beneficient’s charitable donations could be designated for Heppner’s own nonprofit, and they never explained the way transactions would actually make their way to the foundation or the Department of Commerce.
Beneficient initially placed $2.7 million in cash into a trust for the Department of Commerce, which couldn’t access the funds, then transferred the money to the agency after questions were raised for this story.
The company also provided financial statements that show the TEFFI has designated a sliver of mostly illiquid assets for rural development in 117 separate trusts managed by John Stahl, a GWG Holdings associate. Heppner, in his January interview, said the assets in the trusts could be monetized over four to seven years. There is no guarantee they will produce cash.
“A year or two in, people will be asking, ‘Where’s the grocery store?’ These great big plans don’t require them to show anything for a very long time,” said Shane Van Dalsem, an associate professor of finance business at Washburn University in Topeka who also serves on the asset management committee for Topeka Community Foundation.
“The issue here is Beneficient is different from other financial institutions, and so they’re not regulated in the same way,” Van Dalsem said. “So that might be a blind spot for the Legislature and for the governor because they probably historically relied on regulators to oversee the financial institutions, and it doesn’t look like that’s taking place.”
Herndon, the Kansas bank commissioner, has sole regulatory authority, which is limited, over the TEFFI. Herndon emphasized in an interview that he raised red flags about Beneficient from the start — including the SEC investigation and absence of audited financial records.
No other entity has expressed interest in operating a TEFFI in Kansas, Herndon said.
“I still have unanswered questions,” Herndon said. “The same things I expressed through my testimony. And obviously, even though the lawsuits have not made their way through the court, there are some allegations in those lawsuits that are concerning, and we will pay particular attention as it processes through the court system.”
Derek Fletcher, president and chief financial officer for Beneficient, said in an email that the company hired an accountant in March and will have the books in order by July.
Fletcher also said the company hasn’t conducted any transactions since Dec. 31, but that it has a billion dollars worth of potential deals “in our pipeline.” The company doesn’t finance assets from Russia or Hong Kong, as Owens claimed last year, Fletcher said.
A spokesman for Beneficient, responding to questions for this story, mistakenly sent Kansas Reflector an undated letter from the company to its clients marked “privileged and confidential.” The letter’s stated purpose: “To verify the status of different accounts based on inquiries we’ve received.”
The letter says the company is working to finalize agreements and establish accounts before transferring cash and assets marked for economic growth to the Department of Commerce and Beneficient Heartland Foundation.
Heppner, in the January interview with Kansas Reflector, said his goal in launching the TEFFI trade was to “carve this out for Kansas and do it right.”
“Don’t do it with snake oil salesmen,” Heppner said. “Do it right. And we’ll see that benefit float little towns like mine across the state.”