It reportedly circumvented regulations requiring it to register the investments it was selling with the state and worked under legal loopholes that permit certain lenders to function without scrutiny. Lawmakers in Georgia are now debating modifications to strengthen investor protections.
The company and its promoters neglected to submit documentation to the Georgia Secretary of State’s Office’s securities regulators for over ten years. By doing this, the company would have come under scrutiny from regulators and would have been compelled to provide investors with financial information, which may have exposed its failing loan portfolio.
However, it was only after First Liberty’s sudden closure in June that the agency discovered the company was marketing unregistered investments.
Georgia officials were taken aback by the shutdown: the Attorney General’s Office, which oversees dishonest business practices, the Georgia Bureau of Investigation, and the secretary of state all stated that they were not aware of any complaints regarding First Liberty prior to its closure.
Meanwhile, First Liberty allegedly misled investors about the performance of its loans, according to federal authorities. According to the U.S. Securities and Exchange Commission, First Liberty started borrowing funds from new investors to pay back previous investors because borrowers were falling behind at such a startling rate.
An email that Georgia’s banking regulators received seems to have been the only hint of danger in the state administration. A financial advisor who believed First Liberty’s offer was too good to be true made the statement. He wanted to make sure the business has a loan license.
However, the Department of Banking and Finance has limited authority because commercial lenders in Georgia are exempt from licensing requirements.
Actually, First Liberty had already caught the agency’s attention. It had asked whether customers may become confused by the company’s name since it sounded too much like a bank.
However, it was also unable to address that problem. The power of regulators was weakened by a little-known change in state legislation in 2016, and First Liberty managed to get past it.
Bygones
It’s possible that First Liberty’s name is reminiscent of George Bailey, the banker in It’s a Wonderful Life, but building and loan organizations haven’t gained much cultural recognition since then.
Building and lending had already reached their peak when the film was released in 1946. They collected money from members and lent it to their neighbors as part of their community-focused business model. They appeared in Decatur, Dalton, Commerce, and Calhoun. However, the Great Depression destroyed them, and they closed in the ensuing decades. According to records, the last one to be created in Georgia began in 1959.
Georgia decided to update its banking statutes, which were rife with antiquated allusions, decades later. For example, the regulation allowed financial regulators to telegraph crucial documents until 2015.
According to Joe Brannen, the former CEO of the Georgia Bankers Association, a panel of regulators and bankers reviewed the law and suggested revisions to clean up the books. One of their recommendations was to eliminate the numerous allusions to loans and construction.
To ratify the amendment, the Legislature took up a normal bill in 2016. In less than a minute and a half of their two meetings discussing the bill, the House Banks and Banking Committee discussed eliminating the wording pertaining to buildings and loans. There wasn’t much opposition to the law, which covered other subjects. According to documents, neither First Liberty nor its leaders were involved in advocating for it or offering commentary on it.
These entities don’t exist at all. The chief author of the bill, state Representative Bruce Williamson, R-Monroe, stated at the time, “We’re taking that language out of the code because they no longer exist.” In his defense of the bill this month, Williamson claimed that the term had become meaningless and a dead letter in the law. Furthermore, First Liberty was not a bank, although identifying itself as a building and loan.
The Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance did not regulate First Liberty because it did not take deposits. Additionally, lawmakers eliminated the remaining legal basis for state bank authorities to pursue the corporation when they struck building and loan from the law.
In Georgia, unless a company has a bank license, it is prohibited to call itself a bank. Generally speaking, unless banking regulators give their approval, the secretary of state will not grant an LLC using the terms bank or credit union. First Liberty Building & Loan LLC seems to have escaped such regulation when it was founded in 2005.
According to Kevin Hagler, commissioner of the Department of Banking and Finance, it was simply an outdated phrase. I was unaware that it was being used at the time.
But it caught his eye years after the bill was passed. A few years back, Hagler claimed to have heard an advertisement for First Liberty on the radio while driving to work. He claimed that because he was unfamiliar with them, he requested his employees to confirm that they were abiding by the law.
Thanks to TNS
Thanks to 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 questioned Hagler about the company’s authorization to refer to itself as a building and loan. He claimed to have overlooked the law’s removal of that particular sentence.
“But the agency decided it had no authority to act on the radio ads he and Brannen heard because the law no longer recognized building and loan associations,” Hagler said.
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 individual remarked that the rates provided to investors appeared quite dubious.
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.
Credit: Screenshot
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.
Credit: Photo contributed by the candidate
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.
