‘Classic Ponzi scheme’: Angry creditors lambast CEO of Kansas asset-swap business in court records

Beneficient calls complaint ‘rife with falsehoods’ to perpetuate ‘false narrative’

By: - March 1, 2023 5:01 am
Brad Heppner appears for a committee hearing at the Kansas Statehouse

Brad Heppner, left, the founder and chief executive officer of Beneficient Company Group, was accused in a federal bankruptcy court motion of engaging in financial misconduct leading to the Chapter 11 filing by GWG Holdings in 2022. (Tim Carpenter/Kansas Reflector)

TOPEKA — Creditors in a bankruptcy case packed a court document with allegations that the top executive of a Kansas business orchestrated a multiyear fraud to enrich himself and his corporate entities — leaving another business insolvent to the detriment of 27,000 investors who were owed more than $1 billion.

The president of Beneficient Company Group, which is delivering financial services under a unique Kansas charter issued last year, was dismissive of creditors’ assertions about the downfall of GWG Holdings. He said the best course of action would be for creditors to support Beneficient’s transition to Nasdaq and avoid litigation that could undermine investor confidence in a publicly traded version of the company. He said GWG still held perhaps $1.4 billion in Beneficient stock, and a rise in Beneficient’s value would directly benefit creditors.

Lawyers representing these creditors before the U.S. Bankruptcy Court in Houston said analysis of business records, interviews and depositions revealed Brad Heppner, founder and chief executive officer of Beneficient, was at the center of a scheme to plunder GWG by misleading investors, marketing now-worthless bonds, engaging in fraudulent insider deals and siphoning cash.

“Put simply, GWG was a classic Ponzi scheme,” the recently unsealed court filing said. “At the heart of this Ponzi scheme was Heppner. He was the chairman of both the Beneficient and GWG boards, appointed many of their members, hand selected high-level employees and took pains to resist or circumvent any guardrails that should have existed to protect GWG and its creditors from manifestly unjust insider dealings.”

Derek Fletcher, president and chief fiduciary officer at Dallas-based Beneficient, said two other GWG creditor groups filed objections to the motion outlining the supposed Ponzi scheme and disparaging Heppner. The chief restructuring officer at GWG also objected to the same motion, Fletcher said. Attorneys with Beneficient submitted to the bankruptcy court a point-by-point rebuttal to the Ponzi brief.

“What I will tell you is it is a small group that is seeking a litigation strategy,” Fletcher said. “My skeptical view of it is, in many cases, you’re pursuing a litigation strategy because the parties that often benefit from that strategy are the lawyers.”

Fletcher said the best option for GWG creditors would be to support the Nasdaq listing of Beneficient, help create a positive market for Beneficient stock and seek to recover from the bankruptcy by virtue of Beneficient’s financial growth.

“We expect the process to be completed,” said Fletcher, who offered no timeline. “We don’t want there to be any economic, perceived or otherwise, risk to the state of Kansas.”

Attorneys for creditors seeking to litigate the GWG bankruptcy accused Heppner of bankrolling Beneficient by sweeping $350 million from sale of bonds secured by GWG before the disclosure of a U.S. Securities and Exchange Commission investigation and issuance of a stack of subpoenas to GWG.

The Kansas charter granted to Beneficient a year ago by the Legislature enabled the company to begin work with wealthy individuals, small business owners or modest institutional investors — nearly all from out-of-state — by swapping cash or stock for customers’ assets locked in professionally managed investment funds, including venture capital, private equity, structured credit or real estate.

Beneficient’s goal has been to mimic financial services typically reserved for massive institutional investors — such as a state pension systems — for benefit of smaller players in the market who wanted to offload illiquid assets.


Ray Katzer, of Luminous Neon, paints the Beneficient name onto the company's office in downtown Hesston. (Sherman Smith/Kansas Reflector)
Ray Katzer, of Luminous Neon, paints the Beneficient name onto the company’s office building in April 2022 in downtown Hesston. (Sherman Smith/Kansas Reflector)

‘Extremely dangerous’

In a 2021 interim legislative committee meeting, Senate President Ty Masterson, R-Andover, made the motion to put a Kansas stamp of approval on Beneficient. His motion, passed on a near-unanimous vote, led to issuance of a state charter held by Beneficient for a business with offices in Hesston.

Heppner and his allies have directed campaign contributions of at least $150,000 at Kansan politicians viewed as loyal to Beneficient or important to securing the state charter. Cash from Beneficient-linked donors went to Kansas House and Senate political action groups, Kansas GOP gubernatorial candidate Derek Schmidt and Democratic Gov. Laura Kelly.

On Dec. 28, 2021, Beneficient executives and associates gave $30,000 to Kelly’s reelection campaign in increments of $2,000. The same day, a group of Beneficient people donated $24,000 to Schmidt’s campaign for governor.

Before the November election, Beneficient donated $15,000 to the Kansas Republican Party and the Kansas Democratic Party. Beneficient interests also gave the Kansas House GOP campaign committee $55,000 in increments of $5,000 each.

Under legislation approved by wide margins in the full House and Senate, with backing from Republicans and Democrats and embraced by the governor, Heppner was awarded the state charter for Beneficient. It was referred to as a technology-enabled fiduciary financial institution, or TEFFI, rather than a bank or trust.

David Herndon, the state banking commissioner, has consistently raised questions about TEFFIs. He said the office was monitoring court filings in the GWG bankruptcy just as it would transactions involving a bank, trust or mortgage lender. He said the banking commission had no role in the federal bankruptcy proceeding. The business relationship between GWG and Beneficient was severed in 2021, before GWG sought Chapter 11 protection in 2022.

“It raised my eyebrows because those are pretty serious allegations,” Herndon said. “We are watching, but not taking any role in the bankruptcy matter at all.”

A few state legislators, most prominently Democratic Sen. Tom Holland, have sought to convince the banking commission to suspend operation of Beneficient. The commission, however, doesn’t have authority under current Kansas statute to take such action. Holland also has recommended the Kansas Securities Commission and the Kansas Bureau of Investigation launch reviews.

Holland, of Baldwin City, said he recently introduced Senate Bill 199 to provide the banking commission the authority to “deny, suspend, revoke or refuse to approve” any TEFFI. It would authorize the commissioner, with approval of the board, to assess a civil money penalty of not less than $5,000 per violation of state law or regulation. His bill would require TEFFIs to purchase a surety bond in an amount equal to 5% of the institution’s total assets.

“You don’t have any appropriate securities oversight of this operation and that is extremely dangerous,” Holland said.

The state banking commissioner has “no way to regulate or throttle operation of the TEFFI,” the senator said.

Holland also shared concern about vulnerability of the state treasury if people or businesses conducting asset swaps with Beneficient incurred large financial losses resulting in significant state income tax deductions. If Beneficient flourished in the way executives forecast, Holland said, the tax bite in Kansas would grow.


Sen. Tom Holland appears before a grease board in his office where he tracks Beneficient's dealings
Baldwin City Democratic Sen. Tom Holland says the Legislature should strengthen regulatory tools of the state banking commissioner to boost oversight of Kansas’ lone TEFFI, which engages in asset swaps among wealthy individuals and businesses. Holland has attempted to track the company’s dealings on a grease board in his office. (Sherman Smith/Kansas Reflector)

The L bond issue

For most of its history, GWG purchased life insurance policies through the secondary market in anticipation the policies would generate a profit for GWG when an insured person passed away. To finance the business, GWG sold L bonds to outside investors with a typical annual rate of return of 7%. The revenue allowed GWG to buy insurance policies and to make premium payments on policies.

The creditors’ group said in the bankruptcy court motion GWG’s business model was a failure because it couldn’t generate sufficient income. Had GWG accurately accounted for business costs, the filing said, it would have “been readily apparent that the company was under water even before it got off the ground.” The creditors asserted GWG expanded bond sales from 2018 to 2021 while trying to delay collapse.

“People were living longer than GWG had forecast, which resulted not only in delayed payouts but also increased policy premium payments,” according to the dissident creditors’ motion. “There is no indication that the GWG board ever considered slowing L bond sales and broker-dealer registered investment adviser activity, even when facing GWG’s obvious insolvency.”

The creditors blamed GWG and Heppner for “drastic and deceptive measures to avoid defaulting on L bonds for as long as it could.” At one point, a portion of Beneficient was auctioned to GWG, potentially the only bidder, for $600 million in L bonds and shares of GWG.

Heppner allegedly relied on L bond sales to prop up Beneficient and GWG cash for “business and personal uses,” leaving L bond holders to shoulder the majority of GWG’s billion dollar debt, the creditors alleged. Seven weeks before GWG announced in 2021 it wouldn’t pay L bond interest to investors, Beneficient spun off GWG and the state prepared to issue Beneficient the charter.

The small creditors’ group claimed Beneficient’s management team concealed problems by assembling “fanciful projections” the company was worth almost $2 billion. Investors seeking compensation by intervening in the bankruptcy case of GWG claimed a prudent company officer or director would have “concluded that the projections offered by Beneficient’s management were mere fantasy.”

From October 2020 to July 2022, the SEC served GWG no fewer than 13 subpoenas covering dozens of topics, including changes in auditors, calculation of debt on L bonds, marketing and sale of L bonds and financial projections of GWG and Beneficient. The SEC served subpoenas on broker-dealers involved in marketing L bonds through GWG.


Derek Fletcher appears for a Kansas Legislature committee
Derek Fletcher, president and chief fiduciary officer at Beneficient Company Group granted a Kansas charter in 2022, said creditors from a bankrupt business that previously partnered with Beneficient would do better working with Beneficient. (Tim Carpenter/Kansas Reflector)

TEFFI nuts and bolts

Fletcher, the president of Beneficient, said in an interview at the Statehouse the company wouldn’t put Kansas at financial risk and would deliver on a promise to direct resources from Beneficient to support rural economic development. The centerpiece of development has been Hesston, but other communities also benefitted.

Fletcher said the TEFFI law was a solid framework for businesses to “operate soundly, safely and securely.”

“Beneficient continues to focus on delivering to our customers and rural Kansas communities,” Fletcher said. “The TEFFI Act is an excellent example of how government and the private sector can partner for the good of all Kansans.”

He said reasons an investor might work with Beneficient included an individual’s desire to invest differently by unraveling trapped assets. Others might find Beneficient useful when dealing with a death or divorce in the family.

“In order for this to really work — in order for you, an individual investor, to have confidence — there needs to be a fiduciary duty wrapped around this,” he said. “That means that we, a TEFFI, provide you with a quote for your asset, you understand not only what is the value we’re offering, but how did we value your asset, how did we get to that number.”

It’s likely Beneficient’s offer would be adjusted so a net asset value of 100 might be discounted to 75, he said. Beneficient could provide the customer cash, stock in Beneficient or a combination of both.

Beneficient doesn’t accept every customer proposal and doesn’t work with clients to finance art or wine collections, gold bullion or Kansas agriculture property, he said.

“We’re not going to buy Kansas farmland,” he said. “All these fund managers have to be registered with the SEC. We’re not buying anything that’s not registered.”

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Tim Carpenter
Tim Carpenter

Tim Carpenter has reported on Kansas for 35 years. He covered the Capitol for 16 years at the Topeka Capital-Journal and previously worked for the Lawrence Journal-World and United Press International.