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Kansas welcomed a pawn shop for the rich in exchange for a promise of rural development

As Brad Heppner faces allegations of fraud and the SEC investigates his former business, legislators still support his new endeavor

By Sherman Smith

Kansas Reflector

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 continued to support the enterprise when this story was first published in April 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 percent of TEFFI transactions, as required by law. But in April less than $1 million in cash had made its way into a charity Heppner created to serve Hesston.

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.”

  In a Jan. 26, 2022, interview with Kansas Reflector, Brad Heppner describes the “Wild West” of alternative asset transactions as “a pawn shop” for the rich. “You’re haggling over how much is my asset worth?” Heppner says.

‘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 percent 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.

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 percent of transactions for charitable contributions. One-fifth of that figure goes to the Kansas 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 made his pitch to legislators in a March 22, 2021, hearing before a House committee and again on March 29, 2021, before a Senate committee.

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.”