The top executive has resigned from the parent company of a new Kansas financial institution that allows affluent investors to borrow against alternative assets that can be hard to turn into cash.
The company revealed late Wednesday that Brad Heppner had stepped down from Beneficient, the Dallas-based company that he founded where he was chair of the board of directors and served as chief executive officer.
Beneficient is the parent company of Beneficient Fiduciary Financial, which operates in Kansas as a Technology-Enabled Fiduciary Financial Institution under a state law the Legislature enacted in 2021.
The so-called TEFFI was created with the goal of giving sophisticated investors the ability to liquidate alternative assets such as venture capital and private equity that aren’t easily converted to cash.
Kansas is believed to be the only state with a law that allows this type of financial institution to operate.
Over the years, the state’s top banking regulator had expressed concerns about regulating Beneficient’s subsidiary as well as any other similar type of company that would enter the Kansas market.
David Herndon, the state’s banking commissioner, had voiced caution to lawmakers about the fiscal health of Beneficient Fiduciary’s parent company based on negative media reports, federal regulatory actions taken against the parent firm and falling stock prices.
The parent company’s stock was trading Tuesday at 29 cents a share compared to its 52-week high of $6.27 a share.
Earlier this year, Nasdaq notified Beneficient of non-compliance with its $1 minimum bid price requirement, potentially leading to delisting.
As of Jan. 13, the company had fallen below the $1 threshold for 30 consecutive business days. At that time it was trading at 65 cents a share with a market capitalization of just $3.48 million.
According to InvestingPro data, the stock had lost over 97% of its value in the past year at that time.
The company disclosed Heppner’s departure in a filing made late Wednesday with the Securities and Exchange Commission.
The company reported that Heppner resigned immediately June 19 as a director and CEO of the company.
Heppner resigned from the company following a request from Beneficient’s legal counsel – acting at the direction of the board’s audit committee – to participate in a formal interview, according to the SEC filing.
The interview, according to the filing, was to focus on “his knowledge of certain documents and information concerning his relationship to a related entity provided to the company’s auditors in 2019.”
The company said that Heppner refused the request.
“Although it is unclear to the company whether a disagreement exists concerning the company’s policies, practices or procedures, the email correspondence from Mr. Heppner’s counsel appears to reflect that Mr. Heppner disagreed with the merits of the company potentially disclosing on a voluntary basis that he refused to sit for such interview…”
An email from Heppner’s lawyer attached to the filing shows that the executive resisted efforts to disclose his departure in the filing of an 8-K report, which publicly traded companies must file with the SEC to announce significant or major events to shareholders.
“Mr. Heppner was prepared to retire as CEO effective Sunday evening (June 15), but that we were interested in exploring an orderly and mutually agreeable process for this event,” the email said.
“It now appears that the company believes that it can demand concessions from Mr. Heppner in exchange for his departure, using the threat of an 8-K designed to embarrass Mr. Heppner as leverage,” the document said.
“Whatever impact it may or may not have on Mr. Heppner, such an 8-K would surely be detrimental to the company, current board members, and current management.”
It was unclear late Wednesday night how Heppner’s departure from the company would affect the Kansas subsidiary.
The email attached to the SEC filing, however, ended on this ominous note.
“Mr. Heppner believes that the only viable course for the company at this point is an orderly wind down of operations. He is willing to work with board in the coming days on that process,” the email said.
The law allowing Beneficient’s subsidiary to set up shop in Kansas called for the 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 or at the time was a rural opportunity zone county.
An entity was required to set aside 2.5% of transactions for charitable contributions, with part of the proceeds going to the Department of Commerce to promote economic revitalization of Kansas communities under 5,000 people.
Herndon has long been suspect of Beneficient and the law that allowed it to operate.
In the spring of 2022, Herndon authored a four-page letter to lawmakers laying out several “deeply concerning issues” related to Beneficient Fiduciary Financial LLC, which was the first of its kind in Kansas.
The commissioner raised concerns about the company’s intertwined relationship with a company facing an investigation from the Securities and Exchange Commission as well as the inability to get audited financial statements.
Former Democratic state Sen. Tom Holland of Baldwin City had been fiercely critical of Beneficient, characterizing it as “Enron comes to Kansas with a dash of Bernie Madoff.”
He has called for repealing the law, something that never happened.
In November 2023, Herndon renewed concerns over how the state oversaw the institution.
Herndon expressed concerns about regulating not only Beneficient, but any company that might enter the market as this new type of institution.
Herndon said it was still impossible to conduct a “meaningful safety and soundness examination,” which evaluates the soundness of an institution’s assets and the effectiveness of its internal operations, policies and management.
Herndon said those type of examinations are done on regulated banks.
He said state law prevented his office from conducting an examination to consider earnings as a component of an examination and assigns a goodwill asset as a capital component, which departs from the Uniform Financial Institutions Rating System.
He did have a word of caution about Beneficient Fiduciary’s parent company.
“Concerns exist about several negative press reports involving BFF’s parent company Beneficient, federal regulatory actions taken against Beneficent, the freefall of Beneficient’s publicly traded stock, public statements by Beneficient as well as its accounting firm regarding the company as a going concern,” Herndon said at the time.
Herndon noted that his agency only regulates the subsidiary, not the parent company nor any of its other subsidiaries.
“We’ve only examined BFF and only have limited knowledge derived from public filings and statements about the other subsidiaries and the support that they might need from the parent company,” he said.
“But by the very nature of traditional business models, a parent company should provide strength and support to its subsidiaries,” he said.
Derek Fletcher, president and chief fiduciary officer for the Hesston-based subsidiary, acknowledged during that 2023 hearing that the company had run into difficult times.
“Many emerging companies, particularly those that are pioneering a new industry and new products and services, are going to meet challenges and headwinds, and we’re no exception,” Fletcher told lawmakers.
“There have been challenges and headwinds, but I can tell this committee is the organization as a whole, not only our colleagues in Hesston but in Dallas as well, are committed to delivering to the industry, committed to being safe and sound,” he said.
While Fletcher said the company was not averse to a “safe-and-sound” standard that Herndon raised, he noted that a TEFFI is a different line of financial service.
“The concept and the connotation that we can take traditional principles and apply those automatically to new industry really kind of misses the point of the unique nature of the assets and the operations,” he said.
He suggested that there are safety-and-soundness principles that can be adopted that could be applied to the business. He said the company is open to those discussions.
Herndon sounded a similar theme again at the end of 2024 when he appeared before lawmakers.
“We monitor the financial condition of Beneficient through its filings to the Securities
and Exchange Commission and press reports regarding Beneficient,” Herndon said in written testimony.
“Recent filings along with share prices indicate significant stress on the company. Assuming one role of a parent holding company is to be a source of strength for its subsidiaries, that stress level extends to BFF,” he said.
Beneficient has drawn critical coverage from the Wall Street Journal, which was watched closely in Kansas.
The company sued the newspaper for defamation but agreed to jointly dismiss the litigation earlier this year.
The newspaper had examined the parent company’s relationship with GWG Holdings, a financial-services firm that sold bonds to retail investors.
The idea, the newspaper reported, was that GWG would raise the money and Beneficient “would put it to work.”
“Beneficient would use money from GWG’s investor base to acquire stakes in private-equity funds and other high-flying assets, giving rank-and-file investors access to markets typically off limits to them,” the newspaper reported.
“The first funds from GWG to Beneficient, $50 million, landed in June 2019. As far as the board directors were concerned, Beneficient would use the money to expand the business, former directors said,” the newspaper reported.
“Instead, it kicked off what became one of the biggest financial blowups to strike retail investors in years,” the newspaper reported.
Herndon had said there was a murky relationship between Beneficient and GWG Holdings, which until the fall of 2021 had been Beneficient’s parent company.
In the fall of 2021 Beneficient spun off from GWG to become an independent company.
In 2022, Beneficient and five members of its board, including Heppner, were named in a federal lawsuit in Texas accusing the company of misleading investors in the sale of a type of high yield bond — known as an L bond — that bankrolls the purchase of life insurance policies on the secondary market.
The company told The Kansas City Star that the lawsuit was “baseless” and that GWG was not involved in the management of Beneficient or the legislation establishing the TEFFI.
Beneficient notified shareholders in its June 2023 quarterly report that it received a “Wells Notice” from the staff of the enforcement division at the Securities and Exchange Commission in connection with the company’s relationship to GWG.
A Wells Notice is a preliminary determination by the staff to recommend to the SEC that a civil enforcement action or administrative proceeding be brought against the recipient.
SEC filings show that the agency’s enforcement staff had made a preliminary determination to recommend that the SEC file a civil enforcement action against the company alleging violations of federal securities laws related to Beneficient’s association with GWG Holdings.
The company said its actions were appropriate and that it “vigorously” defended itself.
And on July 1, 2024, the company and Heppner received termination letters from the SEC staff advising them that its investigations had concluded and that the staff didn’t intend to recommend any enforcement actions.
