On this Kansas community’s Main Street, the moral risk of easy money • Kansas Reflector (2024)

• Business
• Politics + Government

HESSTON — Under a wind-whipped April sky, a sign painter named Ray Katzer touches up the new letters on the facade above 105 N. Main St. with strokes as deft as a blue-collar Da Vinci. He’s standing on a platform at the end of a boom lift, elevated high above street level, and he works carefully. Nearly done, the tip of his brush flutters over the blue dot over the second “i” in the company’s name: Beneficient.

It’s an archaic form of the adjective “beneficent,” describing someone who is generous or does good, and I suppose the extra letter is meant to inspire confidence or even charm, like “Ye Old Chocolate Shoppe.” But what Beneficient offers is more mysterious than chocolate and is even harder to describe. If it were a taste, it would be something most of us couldn’t afford, like Zafiro Añejo tequila.

It certainly takes a willing suspension of disbelief to swallow.

What Beneficient ostensibly offers is a version of the American dream, where a hometown hero (Brad Heppner, more on him later) returns to revive a struggling economy — risk free! — and bring back a local grocery store so his elderly mother won’t have to drive an hour to buy milk.

Everybody wins. Taxpayers aren’t on the hook because the money to pay for all this hometown goodness will come from the rich folks who need a kind of pawn shop where they can hock their luxury stuff when they need fast cash. Eventually, the state will become an economic powerhouse by chartering more of these Beverly Hills chop shops.

But what Beneficient is really selling, with the help of a bipartisan phalanx of lawmakers who should know better, is a dark vision of Kansas’ future. The plan is disturbingly similar to a previous campaign, carried out 40-odd years ago in another struggling rural state, which resulted in reshaping the American economy for the worse. The details differ, but both rely on economic uncertainty and little daylight between regulators and the regulated.

It’s too early to tell what success, if any, Beneficient will have.

But it’s high time to start worrying.

Beneficient offers cash payouts to “high net worth” individuals looking to ditch assets that might otherwise be difficult to sell. These assets, known as “illiquid” in the trade, include hedge funds, private debt, pensions, real estate. Beneficient is a TEFFI — a technology-enabled financial fiduciary institution — and is the only one of its kind. It’s impressive sounding, but as far as I can tell the “technology enabled” part just means the company connects to the internet.

The name TEFFI is a cute handle for something that should give pause to anyone familiar with the history of risky financial investments. From tulips to tranches, irrational exuberance — a term popularized by former Federal Reserve chairman Alan Greenspan — has been the hallmark of financial folly. It is unfounded optimism driven by psychological factors, instead of any rational benchmark of value. When it comes to Beneficient, this town of 3,800 in south central Kansas has exuberance to spare.

Hesston is home to the world’s only TEFFI because of the persuasive powers of Heppner, who repeatedly told the story about how difficult it was for his 80-something mother to buy groceries because the town’s only market had closed.

There was free money to be had in the “alternative investment” market, he said, enough for a new grocery store and city hall and a revitalized downtown and with a museum and a restaurant or two. He sold the Kansas Legislature on the idea, which easily passed the TEFFI Act last year, and it was gleefully signed into law by the governor.

The promise is that millions of dollars will pour into the state through the TEFFI and that a state-authorized fee of 2.5% per transaction will be set aside to help Hesston and other rural economic zones across the state. The money will boost local economies, build needed things like grocery stores, all without risking a single dime of taxpayer money.

But few people in Hesston — or anywhere else, for that matter — seem to fully understand what the TEFFI does.

The state bank commissioner says nobody in the industry understands Beneficient’s business model. Ask some of the six employees at 105 N. Main, and they’ll refer you to Beneficient headquarters in Dallas for an explanation. Ask the city administrator and he will stress the amount of trust he has in the company founder’s vision, and what a benefit risk-free money will be for the town. Ask the retiree who lives a few blocks down the street from the Beneficient offices, and he’ll share his fears about who might be on the other side of those alternative investment transactions.

While most officials in Hesston say they have confidence in the TEFFI vision of the future — Kansas could become the “financial fiduciary” capital of the world! — there are troubling signs on the horizon.

As reported by Kansas Reflector editor Sherman Smith, the firm can’t provide audited financial statements for previous years, is entangled with a Securities and Exchange Commission investigation, and was formerly associated with a company that is the target of lawsuits from multiple investors alleging fraud.

In Kansas, the company essentially created the regulatory framework under which it operates. It persuaded lawmakers to create legislation designating it as a pilot program, with headquarters in Hesston, and made generous political donations on both sides of the aisle. In addition to showering legislators with money, the company or those associated with it gave $22,000 to Gov. Laura Kelly’s campaign for reelection, and an equal amount to her presumptive GOP opponent, Attorney General Derek Schmidt. The company also designated $1 million to the Office of the State Bank Commissioner to create a regulatory department.

The TEFFI Act is the vision of a local kid who made his career in finance, 56-year-old Brad Heppner. He’s described the TEFFI as a “pawn shop” for rich people, and practically nobody in Hesston qualifies as the targeted demographic, individuals with a net worth of at least $5 million.

Heppner lives in Dallas now, has a 1,500-acre ranch with a couple of helipads, and was the chairman of a company selling another novel kind of alternative investment, L Bonds. These bonds were privately issued, alternative investments used to buy life insurance policies in the secondary market. Heppner is currently a defendant in a federal lawsuit alleging that he and others misappropriated $350 million from the L Bond company, GWG Holdings, as startup money for Beneficient.

Heppner told Kansas Reflector that TEFFI customers will be located in the nation’s wealth centers, including New York, Dallas, Chicago, San Francisco, and Boston. Only a few individuals from Kansas would be among the client list.

He said he had originally intended to take the TEFFI idea to South Dakota, but had a change of heart when his mother suggested during a Saturday morning phone call that perhaps some of the money the idea would generate could be used for a grocery store in Hesston. The city, he said, was a “food desert.”

He flew to town the very next day and, over some beers with old friends, came up with the plan to locate the TEFFI in his hometown and spur economic development through fees designated for private foundations and public nonprofits. Those funds would provide capital for a revived downtown, which was envisioned in a concept drawing shown recently to the Hesston City Commission.

Beneficient declined to share the concept drawing of its vision for Hesston with Kansas Reflector, but city administrator Gary Emry said the multi-year plan included reshaping much of downtown. It included a couple of reconstructed old mills, perhaps with an observation tower atop one of them, and a restaurant at the bottom. Emry recalled a hotel downtown, a chapel for weddings, even a museum.

“Everyone I’ve spoken with,” Emry said, “about the process or Mr. Heppner specifically, have only had kind words to say.”

Emry said he could not explain how the TEFFI worked, but that he had no reason to doubt Heppner. Because he trusted him, there was no need to look at any lawsuits in which Heppner might be named.

Emry said he would advise skeptics to “stand by and watch.”

A local skeptic who would like to know more about the world’s only TEFFI is Dave Obsorne, a retired director of international admissions for Hesston College, a private college associated with the Mennonite Church. Osborne, who lives on Main Street a few blocks south of the Beneficient office, is a careful man who takes copious notes on a yellow legal pad and sometimes shares his views in letters to the editor of the local paper.

“I read the bill,” Osborne says of the TEFFI Act. “It’s profoundly indigestible.”

Osborne said he worries about whether there will be sufficient regulation for this new type of banking, and where the clients might come from. He said he would like some reassurances that the TEFFI wouldn’t be used as a tax dodge by the rich or as a global money laundering scheme.

Despite company assurances that the TEFFI’s client base would be in the United States, Kansas bank commissioner David Herndon said there’s nothing in state law to prevent Beneficient from doing business with global clients. He also said there was probably no way for state regulators to know the identity of a foreign customer until after the transaction. The transaction, he said, involved a client surrendering title to an asset, which is then placed in a trust administered by a third party.

Herndon, who has consistently expressed concerns to lawmakers about Beneficient’s plan, said his office was officially neutral on the creation of TEFFI. He said it was unusual for an entity to be so closely involved in writing the regulations to which it would be bound, and that the $1 million to help create a regulatory department was a “tremendous amount of money, far more than any other regulatory fee.”

Herndon declined to comment on the accuracy of Heppner’s analogy that Beneficient was a pawn shop for the rich. When asked about the viability of its financial model, he said there wasn’t enough data to understand it.

“In my career as a community banker,” Herndon told me, “including as a loan officer, bank policy would not permit me to make a loan secured by these types of (alternative) assets.”

The problems, he said, were that the assets are illiquid, the true value of the asset is difficult to determine, and there is no reliable way to gauge whether cash flow will be sufficient to service the debt.

When the state bank commissioner expresses such concern, why has everyone from the city administrator of Hesston to the governor of the state crowded on board the TEFFI bandwagon?

The easy answer is money. It’s the influence money buys, the promise of easy money to hungry communities, the assurance that Kansas taxpayers aren’t at risk. But the deeper answer is a far more cynical one, and it has to do with South Dakota.

In 1980, South Dakota was suffering from the decline in family farming. It was a time of economic uncertainty and high inflation — like now. But the Mount Rushmore state had one thing going for it that Citibank of New York saw as an asset to be exploited: It had no cap on credit card interest rates. So the state legislature acted quickly and passed the “Citibank bill,” which invited the credit card company to open a subsidiary in Sioux Falls — and to pursue a plan of offering high-interest credit cards nationwide.

This wrecked the ability of other states to regulate credit cards and ended longstanding consumer protections against long-term debt. Delaware soon followed with the “Financial Center Development Act.”

While South Dakota and Delaware have reaped the benefits of loosened regulation on credit cards and other bank services, the residents of other states have carried the burden. If you have a credit card or have received a credit card offer, it mostly likely came from Delaware or South Dakota. Few consumer advocates are likely to say the changes brought by the game-changing South Dakota credit card legislation of 40 years ago was a good thing for the country.

Now, South Dakota is again making the most of a loosely regulated, Wild West style of banking in which global elites have used “opaque trusts” to shield their wealth from tax authorities and the public. There is no evidence the TEFFI Act would allow the same thing in Kansas, but we just don’t know enough about Beneficient to know the interplay of trusts, clients, and investors.

Heppner clearly envisions Hesston as a Sioux Falls-like mecca of a new financial frontier.

“Kansas is the only state that has this,” Herndon said. “So, reputational risk is certainly on the table. What if this doesn’t work? What if it works magnificently? We just don’t know.”

Either way, I have a feeling Kansans are in danger of losing a bit of our collective souls. There has to be more to the TEFFI program than just being a pawn shop for the rich. When we stop asking questions about where the money is coming from, we’ve forgotten our obligation to the common good and shirked our responsibility to those beyond our borders.

One way or another, we’ll all be paying for that damned grocery store in Hesston for a very long time. And oh yeah, Mr. Heppner. Hesston is not a food desert. There are half a dozen markets in Newton, less than 10 miles away.