Tensions rise between KS regulator and company offering quick cash for rich investors

Kansas’ top bank regulator wrote to lawmakers last month warning of “new and deeply concerning” information about a company promising to deliver millions for rural Kansas through a first-of-its-kind financial institution.

Now, the relationship between the company and the Office of the State Bank Commissioner has grown increasingly contentious through a series of charged letters and seemingly personal attacks traded between the company and State Bank Commissioner David Herndon, according to documents obtained by The Star.

Texas-based Beneficient is the first company to create a Technologically Enabled Fiduciary Financial Institution, or TEFFI, under a law approved by the Kansas Legislature last year. TEFFIs are a novel way to allow wealthy investors to access fast cash using assets that are typically difficult to quickly convert into cash, such as art portfolios or hedge funds.

Under the Kansas law, Beneficient paid the state a $1 million fee for the Office of the State Banking Commissioner to develop regulations for TEFFIs. A cut of the revenue generated from the project would be funneled into economic development for rural communities in Kansas.

But in an April 10 letter to lawmakers, Herndon highlighted a lack of audited financial statements and an insufficient number of transactions to examine the company. He also pointed to a pair of federal lawsuits involving Beneficient.

In a Delaware case, a private equity firm has alleged that Beneficient defaulted on a 2019 agreement that specifically called for the company to “cease to finance or otherwise acquire future private equity or other alternative.”

Beneficient’s CEO, Brad Heppner, was released last week as a defendant in a separate federal lawsuit in Texas against the company’s former parent company, GWG Holdings, alleging the company had defrauded investors. Court records do not explain why Heppner and other current members of Beneficient’s board of directors were released.

“The exact relationship between GWG and Beneficient has never been made clear. As evidenced by multiple public filings, the companies are financially intertwined and have been historically managerially intertwined. But the continued absence of audited financial statements has made their exact relationship difficult to determine,” Herndon wrote in early April.

Beneficient has rejected the claims in both lawsuits as false. Herndon’s letter prompted a nine-page response from Beneficient CFO Derek Fletcher.

“At a moment in which we should be celebrating the economic growth zone contributions and the success of the TEFFI pilot program, our attention is diverted by inaccurate reporting and inflammatory, sensationalized public statements including those contained in your letter,” Fletcher wrote in his April 22 response.

He accused Herndon, who was appointed to his position by Democratic Gov. Laura Kelly in 2019, of violating Kansas’ confidentiality laws and being “more focused on attacking Beneficient and perpetuating public misunderstandings than on regulating and examining our TEFFI pilot.”

Fletcher criticized Herndon for going to the Legislature with his concerns rather than straight to Beneficient and questioned what the regulator was doing with the money Beneficient paid the state to develop regulations.

In a statement to The Star Monday, Fletcher said the TEFFI program was off to a “strong start” and benefiting rural Kansas.

“While we disagree with every assertion and concern in Commissioner Herndon’s letters, we’ve been able to have a productive dialogue with Deputy Commissioner Tim Kemp and all of the other OSCB members who have engaged with us, and we look forward to working with the OSBC on how we can continue to advance this innovative public-private partnership,” Fletcher said.

Herndon did not respond to The Star’s request for comment.

The letter delved into personal matters highlighting Herndon’s decision to work remotely from Florida during the Legislative session, a choice Herndon said in a response was due to “private family matters.”

Stewart Sterk, a Yale Law School professor who specializes in trust and real estate law, said the letters appeared unusually aggressive for an entity engaging with a regulator and indicates that Beneficient thinks they “have the Legislature in their pocket.”

The company, company officials and family members showered elected officials in Kansas with more than $50,000 in campaign donations in 2021, including $22,000 apiece for Kelly and her likely Republican opponent Attorney General Derek Schmidt.

“It looks like the regulated entity is trying to essentially pummel the regulator into doing what it wants,” Sterk said. “That’s the kind of thing where unless you were just trying to get rid of the commissioner you wouldn’t get into (the personal attack.) That’s just something that poisons the well when you’re trying to deal with them again.”

Kansas lawmakers react to the dispute

Herndon wrote that he did not have audited financial statements he’d been asking Beneficient to provide for months and that the company hadn’t conducted enough business for him to conduct a thorough examination.

In his letter, Fletcher insisted that the single transaction Beneficient had executed in Kansas was large enough for Herndon to begin examining the company. Furthermore, he pointed to audited financial statements performed while the company was still tied to GWG Holdings. He said financial statements regarding only Beneficient were delayed because of complications from the companies’ separation.

According to the letter, the first transaction consisted of a $250 million loan portfolio and $357 million in assets distributed through trusts and funds.

“Your justification for not examining Beneficient rings hollow,” Fletcher wrote. Fletcher told The Star Monday that an internal auditor had successfully examined the company based on the information available.

Herndon said in a May 2 letter responding to Fletcher that he had never received audited financial statements specifically for Beneficient and that examining the company after a single transaction would be “unheard of.”

“The OSBC cannot conduct a ‘normal and thorough’ and ‘thoughtful and competent’ examination without multiple external transactions to review, especially with regard to anti-money laundering and Bank Secrecy Act matters, which are matters of federal law,” Herndon said. “We will not be pressured into slacking in our regulatory oversight.”

Members of the Kansas Legislature were provided copies of both letters even though they were addressed to Beneficient and Herndon.

Rep. Jim Kelly, an Independence Republican and Chair of the House Financial Institutions and Rural Development Committee, said he didn’t think the Legislature needed to act on the growing dispute until the committee created to oversee the TEFFI program meets sometime this summer or fall.

“What I’ve seen has been a disagreement on what’s being said,” Kelly said. “I don’t know whether it’s correct or not correct. Until that washes out I wouldn’t comment on it myself.”

Sen. Tom Holland, a Baldwin City Democrat who has called for the suspension of the TEFFI program, applauded Herndon for not backing down to Beneficient’s requests.

“This has to be done in full transparency, everything needs to be looked at and I’m glad that the commissioner and the administration are calling Beneficient out on their performance inadequacies,” Holland said.

Disagreements between regulators and regulated entities are not uncommon, said Kenneth Kriz, Director of the Institute for Illinois Public Finance.

“Obviously the context is a bit different in that there is such a strong support for this organization by members of the Legislature,” Kriz said.

In his letter, Fletcher criticized Herndon for bypassing the company and bringing his concerns straight to lawmakers, especially given that he “knew or should have known” that the letter “would be leaked to media.”

“I regret that we must consume the valuable time of those copied on this letter over matters that could have been easily addressed with a phone call or meeting,” he wrote.

But Herndon said his duty as state official is to report to the executive and legislative branches.

“The more the public becomes interested in a matter, the more important it should be to keep these officials updated on that matter. The OSBC intends to keep the legislature and executive branch updated regardless of any media activity,” Herndon said.

The Star’s Jonathan Shorman contributed to this story.