A company that started out in the business of providing bridge loans ultimately morphed into a Ponzi scheme as borrowers defaulted on those loans, U.S. regulators allege.
The U.S. Securities and Exchange Commission (SEC) filed securities fraud charges and obtained an asset freeze order against First Liberty Building & Loan LLC and its founder, Edwin Brant Frost IV. The regulator alleged that when First Liberty’s alternative lending business faltered, it transformed into a Ponzi scheme that ultimately defrauded investors of at least US$140 million.
According to the SEC’s complaint, starting in 2014, Georgia-based First Liberty raised funds from retail investors via promissory notes that offered annual returns of between 8% and 18% that it planned to generate from providing short-term bridge loans to small businesses at relatively high interest rates.
However, the SEC said that most of the loans ultimately defaulted. It alleged that since 2021, the company effectively became a Ponzi scheme by paying returns to existing investors from money that was raised from new investors.
The SEC also alleged that Frost misappropriated investor funds for personal use.
“The promise of a high rate of return on an investment is a red flag that should make all potential investors think twice or maybe even three times before investing their money. Unfortunately, we’ve seen this movie before — bad actors luring investors with promises of seemingly over-generous returns — and it does not end well,” said Justin Jeffries, associate director of enforcement for the SEC’s Atlanta office.
The allegations have not been proven.
However, without admitting or denying the SEC’s allegations, the defendants consented to the asset freeze order, the appointment of a receiver over the business, and other emergency relief.
The SEC is seeking sanctions and disgorgement orders against First Liberty and Frost.