First Liberty Building & Loan’s business was no secret.

The Newnan-based company advertised its small business loans during Atlanta Braves games and on talk radio. It encouraged investors on conservative podcasts to participate in the “patriot economy” by pitching in money to lend out. Its founder, Brant Frost IV, became a prominent figure in Georgia’s conservative politics with an arsenal of campaign contributions to far-right candidates and causes.

Since it collapsed in late June, investors and political observers have been left to wonder how First Liberty evaded scrutiny from state and federal regulators as it gathered funds from hundreds of investors and allegedly ran a Ponzi scheme that siphoned more than $140 million.

First Liberty Building & Loan advertised itself as a trusted, faith-based lender across conservative media in Georgia and beyond. Credits: AJC | First Liberty Building & Loan | Northern District of Georgia | Brant Frost V/Facebook | The Macon Telegraph

It operated within gaps in state law that allow some lenders to operate without scrutiny, and it apparently side-stepped laws requiring it to register the investments it was selling with the state. Georgia lawmakers are now considering changes to bolster safeguards for investors.

For more than a decade, the company and its promoters failed to file paperwork with the securities regulators at the Georgia Secretary of State’s Office. Doing so would have put the company on regulators’ radar and forced it to disclose financial information to investors, potentially revealing its faltering portfolio of loans.

But the agency didn’t know the company was selling unregistered investments until after First Liberty abruptly shut down in June.

The shutdown caught Georgia officials by surprise: In addition to the secretary of state, the Georgia Bureau of Investigation and the Attorney General’s Office, which polices deceptive business practices, said they were unaware of any complaints about First Liberty before it shut down.

Meanwhile, federal authorities contend, First Liberty misled investors about how its loans were performing. Borrowers were falling behind at such an alarming rate that First Liberty began using new investors’ money to repay existing investors, the U.S. Securities and Exchange Commission alleges.

The only inkling of trouble in state government appears to have been an email received by Georgia’s banking regulators. It came from a financial adviser who thought First Liberty’s offer sounded too good to be true. He wanted to check that the company was licensed to offer loans.

But in Georgia, commercial lenders don’t need a license, so the Department of Banking and Finance had little room to act.

In fact, the agency had taken notice of First Liberty before. It had questioned if the company’s name made it sound too much like a bank and if consumers might get confused.

But it couldn’t take up that issue, either. A little-noticed change in state law in 2016 had opened a crack in regulators’ power, and First Liberty slipped through it.

Bygones

If First Liberty’s name hearkens to the banker George Bailey in “It’s a Wonderful Life,” it may be because building and loan associations haven’t had much cultural cachet since then.

When the movie came out in 1946, building and loans had already peaked. Their business model focused on local communities: They gathered money from members and lent it to their neighbors. They popped up in Calhoun and Commerce, Decatur and Dalton. But they were crushed by the Great Depression and shut down in the decades that followed. Records show the last one formed in Georgia started in 1959.

Decades later, Georgia set out to modernize its banking laws, which were littered with outdated references. Until 2015, for instance, the law said banking regulators could send important documents via telegraph.

A group of bankers and regulators studied the law and recommended updates to clean up the books, said Joe Brannen, the former CEO of the Georgia Bankers Association. Among their suggestions: Removing the dozens of references to building and loans.

Joe Brannen, former CEO of the Georgia Bankers Association, says that a 2016 effort to modernize Georgia's banking laws inadvertently created the loophole that allowed First Liberty to avoid scrutiny.
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In 2016, the Legislature took up a routine bill to approve the change. The House Banks and Banking Committee held two meetings to talk about the bill, and they spent less than a minute and a half talking about deleting the building and loan language. The bill, which included other topics, passed with little opposition. First Liberty or its leaders had no role in lobbying for it or commenting on it, records show.

“There’s no such thing as these entities. They no longer exist, so we’re taking that language out of the code,” the bill’s lead sponsor, state Rep. Bruce Williamson, R-Monroe, said at the time. This month, Williamson defended the bill, saying that the term “lost all legal significance,” a dead letter in the law. And even though First Liberty called itself a building and loan, it wasn’t actually a bank.

First Liberty didn’t accept deposits, so it wasn’t regulated by the Federal Deposit Insurance Corp. or the Georgia Department of Banking and Finance. And when lawmakers struck “building and loan” from the law, they removed the last legal authority for state bank regulators to go after the company.

It is illegal in Georgia for a business to call itself a bank unless it is licensed as one. As a policy, the secretary of state won’t grant an LLC using the words “bank” or “credit union” unless banking regulators approve. When First Liberty Building & Loan LLC was established in 2005, it apparently avoided triggering that rule.

“It was just an antiquated term,” said Kevin Hagler, commissioner of the Department of Banking and Finance. “I had no idea that somebody at that time was using it.”

Years after the bill passed, however, it got his attention. Driving in to work a few years ago, Hagler said he heard an advertisement for First Liberty on the radio. He hadn’t heard of them, so he said he asked his staff to make sure they were following the law.

By using the antiquated term "building & loan," First Liberty avoided rules restricting businesses from calling themselves banks or credit unions. (Arvin Temkar/AJC)

Credit: TNS

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Credit: TNS

Not long after, Brannen heard a First Liberty ad on an Atlanta Braves radio broadcast, and he bristled at First Liberty’s slogan: “We say yes when the big banks say no.” He asked Hagler why the company was allowed to call itself a building and loan. He said he’d forgotten about the legislation striking that phrase from the law.

But because the law no longer recognized building and loan associations, Hagler said, the agency decided it had no authority to act on the radio ads he and Brannen heard.

If building and loans hadn’t been struck from the law, Hagler said, “we would have at least had an issue with it.”

‘Very suspicious’

Late last year, concerns about First Liberty reached the Department of Banking and Finance again.

A financial adviser reached out because his client was considering investing in a First Liberty loan. The investment “raised an eyebrow,” Hagler said. The rates offered to investors seemed “very suspicious,” the person wrote.

The adviser contacted the state to see if First Liberty was a licensed lender. The answer was no: The department doesn’t oversee commercial lenders like First Liberty.

First Liberty’s slogan, “We say yes when the big banks say no,” caught the attention of the Georgia Department of Banking and Finance, but the agency decided that it did not have the authority to act because the state does not regulate commercial lenders. (YouTube screenshot)

Credit: Screenshot

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Credit: Screenshot

The Department of Banking and Finance suggested contacting the Secretary of State’s Office instead, Hagler said.

“I don’t know if he pursued it further or went anywhere with it,” Hagler said.

There was good reason to be wary of First Liberty’s promises. According to the SEC, it offered “friends and family” investors eye-popping returns of 16% a year, far more than the stock market produces in a typical year. Even investors off the street could get up to 13%.

And according to the SEC, Frost described the loans as being safer than they really were. He told some investors that only one of his loans had ever defaulted, and he told at least one investor he’d cover losses out of the company’s profits, the SEC alleges. In reality, the agency contends, potentially as many as 90% of the loans were in default.

Frost attorney Joshua Mayes declined to comment. Frost has previously taken responsibility for First Liberty’s collapse, saying he is “resolved to spend the rest of my life trying to repay as much as I can to the many people I misled and let down.”

Little warning

For years, the alleged scheme worked, managing to avoid government scrutiny.

Ponzi schemes often get by until investors start asking questions or stop getting paid, said Andrew Jennings, an Emory University law professor who studies white-collar crime, but they all collapse eventually.

According to the SEC, some First Liberty investors were getting paid as late as June.

State securities regulators can play an important role in policing wrongdoing, he said: In states like Georgia, they have sole jurisdiction over smaller investment firms, picking up cases federal authorities can’t take.

Noula Zaharis, the director of the Secretary of State’s securities division, said her office didn’t hear about First Liberty until the company announced it was shutting down. Since then, it has heard from at least 80 investors, she said.

“All of a sudden, everything stops, and investors will get nervous and will immediately start complaining,” she said. “That’s normal.”

Zaharis said the agency has just 10 full-time employees to field paperwork from securities dealers, investigate wrongdoing and provide investor education programs. And while it shares jurisdiction with the SEC over large firms, it has sole authority in Georgia over smaller brokers and investment opportunities.

She said her staff planned to speak with everyone who filed a complaint and would investigate the company and its promoters’ failure to register with the state.

State Rep. Noel Williams Jr., chairman of the House Banks and Banking Committee, said it was too early to say what might change in the wake of First Liberty's collapse.

Credit: Photo contributed by the candidate

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Credit: Photo contributed by the candidate

The episode may lead to changes in how Georgia regulates investments. Unless the state takes action to close its loopholes, consumers are vulnerable to similar scams.

State Rep. Noel Williams Jr., chairman of the House Banks and Banking Committee, said House leadership was “fully committed to ensuring the necessary guardrails are in place to protect Georgians from bad players, financial scams and monetary fraud of any kind.”

Just over the state line, Jennings said, Alabama offers a strong model: The Alabama Securities Commission is the “crown jewel” among state regulators, he said.

It’s an independent agency with law enforcement powers, solely focused on investment issues, Jennings said. And because much of the money it brings in from fees and fines goes back into its budget, it has a reputation for being tenacious. It also boasts more than 50 employees.

But in Georgia, Williams said it was too early to say what might change: He said lawmakers still needed to gather the facts about how First Liberty went undetected.

Still selling

By May, the walls were beginning to close in on First Liberty.

That month, the SEC’s staff interviewed Frost, and the agency alleges he continued to misrepresent the business he was running.

Records show Frost kept trying to bring in investors even after the authorities contacted him. In one email obtained by the SEC, Frost told a prospective investor in June that he was trying to raise $3.5 million to lend to an artificial intelligence project.

The business had big promise, he told the investor: It would use AI to evaluate loans. He said lenders were lining up to use it, and the company could be worth $100 million within a few years. He offered “handsome” returns of up to 20%.

He said it would help First Liberty write even more loans, but he said the investor would have to act fast: Frost needed to have the money in just over a week.

Eleven days later, First Liberty closed for good.

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Brant Frost IV, his family and businesses have contributed more than $1.4 million to political causes, much of it in the last few years. Federal officials say Frost and his First Liberty Building & Loan used at least $570,000 of investor money to make political contributions. (First Liberty Building and Loan YouTube via AJC)

Credit: First Liberty Building and Loan YouTube via AJC

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Kelvin and Janelle King talk with the press at the state Capitol, Tuesday, March 8, 2022, at the Georgia State Capitol. (Steve Schaefer for the AJC)

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