Federal Judge Gives First Liberty Founder 15 Years for Wire Fraud Behind a $140M Bridge-Loan Investor Program
A federal judge sentenced Edwin Brant Frost IV, founder of the now-defunct Georgia lender First Liberty Building & Loan, to 15 years in prison on October 26 and ordered him to pay $76,454,374.39 in restitution.1 Frost pleaded guilty on May 12 to one count of wire fraud.1 Chief U.S. District Judge Leigh Martin May gave him one year more than the 14 prosecutors asked for and ten more than the five his lawyers requested.2 "I have messed up a lot of good people's lives," Frost told the court.3
Frost's lawyers wrote that he "is profoundly remorseful" and "accepts full responsibility for his conduct." A court-appointed receiver is still searching for assets.3
First Liberty raised at least $140 million from about 300 investors through loan participation agreements and notes paying 8% to 18% a year, the Securities and Exchange Commission said when it sued in July 2025, to fund short-term bridge loans to small businesses that investors were told would be repaid with Small Business Administration or other commercial loans.4 5 Prosecutors say that from at least 2021, new investor money paid earlier investors and several borrower defaults went undisclosed.6
Bottom line for funders: by the SEC's account, most of the bridge loans stopped paying and new investor money paid the old. "Potentially 90%" of the loans were in default when the SEC sued in July 2025, the complaint says, a figure the Associated Press also reported at the time.5 7 As of 2021, about 80% of the interest and principal paid to investors came from new investor money rather than from borrowers, the SEC says.5
The SEC says bridge borrowers paid 18%, friends-and-family participants earned 14% to 18%, and the spread in that program was typically 2%.5 That spread had to cover First Liberty's costs and any loan that stopped paying, and the SEC says the spread and fees "did not generate enough revenue to pay the interest owed to investors."5 In a true pass-through participation, investors stop being paid when the borrower does. The SEC says First Liberty kept paying them on defaulted loans anyway.5
The limits: these are SEC allegations. First Liberty and Frost consented to a judgment granting the SEC's requested relief without admitting or denying them, with money remedies still to be set, and the criminal case ended in a plea to one wire fraud count.4 Restitution of more than $76 million is what the court ordered repaid, not the $140 million raised.1 8
What Alternative Business Lenders Need to Know
What does one borrower's file show?
The complaint traces one borrower in detail. First Liberty lent it $3.4 million in October 2019, due May 2021, and $900,000 the next month. In May 2021, after the first loan matured unpaid, it made a third loan of $1.5 million, and in September 2021 a fourth of $400,000. The borrower filed for bankruptcy in August 2022. In December 2022, the SEC says, First Liberty raised $6.5 million from investors, purportedly for a fifth loan to the same borrower.5 Prosecutors separately say Frost kept providing bridge financing to at least one company after it defaulted.6 In the bankruptcy, First Liberty's claim covered only the second and third loans. The court approved an unsecured claim of $375,000, and as of the complaint nothing had been paid on it. The investor in the first loan kept receiving monthly interest until June 2025.5
Three tests and one check for a funder that sells participations
Each test is our suggestion, mapped to a failure the SEC describes.5
Renewals to late borrowers, which applies to any funder that renews. In merchant cash advance, a renewal that pays off a struggling merchant's balance can make a late position look current, the same pattern as the borrower file above. Treat new money to any borrower who is past due as a reporting event for participants, with a second sign-off.
Notice compliance: First Liberty's participation agreements promised investors notice of any material adverse change in a borrower's condition, and the SEC says First Liberty failed to give it while borrowers defaulted.5 Read the notice clause in your own participation agreements and confirm that your servicing reports actually trigger it when a borrower goes past due.
Takeout evidence, for bridge and refinance-dependent lenders rather than deals repaid from a merchant's own receipts: an expected SBA loan is not a document. Keep the refinancing lender's signed commitment letter in the file, dated before funding, and recheck it at maturity.
One general syndication check, not drawn from the First Liberty filings: a lead that keeps a meaningful share of every deal it syndicates loses money alongside its participants. Ask what share the sponsor holds in each position, and get the answer written into the participation agreement.
One ask for a participant
Ask for loan-level performance, not a default count. The SEC says Frost told some investors, one as recently as May 2025, that First Liberty had only ever had one bridge-loan default.5 Ask instead for a monthly file showing each position's balance, days past due and payments received, and compare what you were paid with what borrowers paid on the same loans. Money you were paid on a bad deal can count against you in a receivership. In August, First Liberty's receiver said investors had lost at least $66 million and asked the court to approve a claims process in which investors who already got much of their money back would not collect a greater share than investors who got little, with the first payouts going to those who had recovered the least. As of that report, the court had not approved it.9
Close enough to matter. From about 2014, First Liberty sold "friends and family" loan participation agreements: investor money was pooled and lent to named borrowers, investors took a fixed share of the interest, and the lender kept the spread and the loan fees. From 2024 it added promissory notes advertised on radio, podcasts and its website, in tiers starting at $25,000, that were not tied to any loan.5 In our view, three pieces match how many merchant cash advance syndications and revenue-based note programs work: pooled outside capital behind specific deals, a contract that promises investors notice when a deal goes bad, and a sponsor paid on the spread.
MCA funders have seen this before. In July 2020 the SEC sued Complete Business Solutions Group, which did business as Par Funding, alleging it raised nearly half a billion dollars from about 1,200 investors by selling promissory notes through a network of unregistered sales agents, and the court appointed a receiver.10 Its chief executive, Joseph LaForte, was sentenced in March 2025 to 15 and a half years in prison.11
The difference at First Liberty was who was on the other side and how big the sponsor was. First Liberty had fewer than ten employees,5 and it sold to individuals, many of them retirees, prosecutors said.2 In our view, a syndicate partner or institution is better placed to demand loan-level data, but that protection exists only if it is used: a participant that could ask for the file but never does is relying on the same reports a retiree was.
When do participations and notes become securities?
Sooner than many sponsors assume. The SEC charged First Liberty with securities fraud in the sale of the participations and notes it describes,5 and in Par Funding it alleged securities registration violations as well as fraud over notes sold to the public.10 Under the Supreme Court's 1990 Reves decision, a note is presumed to be a security, and broad sales and advertising as an investment weigh against rebutting that presumption.12
A participation can also be an investment contract under the Supreme Court's 1946 Howey test, in which investors expect profits from the efforts of a promoter or third party.13 Howey said "solely," but the Ninth Circuit has not read that word literally and asks whether others' efforts are "the undeniably significant ones."14 In our view, notes advertised on radio and podcasts in $25,000 tiers fit the Reves description. Advertising also narrows the exemptions. The SEC's Rule 506(b) private-placement exemption does not allow general solicitation or advertising,15 and Rule 506(c) allows it only if every purchaser is an accredited investor and the issuer takes reasonable steps to verify that status.16 Our suggestion: have securities counsel review how any participation or note offering is structured, and before it is advertised.
Where did the SBA takeout break?
At funding. The complaint says Frost told investors that bridge borrowers "had already received approval for SBA loans" and needed money only while the SBA process finished. In fact, it says, "few, if any" had preapproval when the bridge was funded.5 A bridge priced at 18% is only as safe as the refinance meant to retire it, and that refinance is harder to get now. The SBA approved 56,130 7(a) loans for $32.4 billion in fiscal 2026 and began fiscal 2027 with tighter underwriting rules, American Banker reported.17 That compares with 78,011 loans for $37.24 billion in fiscal 2025, about 28% fewer loans and 13% fewer dollars by our arithmetic, as we covered on October 10.18
Our Opinion
In short-term business lending, the takeout is collateral, and it should be documented like collateral. Funders already verify bank statements, liens and ownership before they wire. A promised SBA loan, a bank refinance or the sale of a business rarely gets the same check, even when it is the thing that repays the deal. At First Liberty, the SEC says, few if any bridge borrowers had the SBA preapproval investors were told about.5
The same gap shows up in reporting. A default count is the easiest number for a sponsor to keep low, because the sponsor decides when a loan is called a default. A 30-day past-due balance is harder to manage. Funders that raise outside money should report past-due balances and collections against distributions on a fixed schedule, and funders that buy into other people's deals should make that report a condition of funding.
Add a primary-source verification layer to automated underwriting
Automated underwriting built for consumer credit is shown pulling credit reports and bank statements but skipping business verification, which lets synthetic entities, existing liens and stale good-standing statuses through.
Cobalt Intelligence's APIs return Secretary of State data from official state sources in real time for all 50 states and D.C., so a team can confirm that each business on a funding file exists and is in good standing, including on deals bought from other funders. OFAC sanctions screening is also available, and UCC lien data currently covers 11 states.
Free Tools for Lending Teams
Headlines You Don’t Want to Miss
Live Oak Bancshares, one of the largest SBA 7(a) lenders by dollars, reported third-quarter loan and lease production of $2.13 billion on October 21, up 37.8% from the second quarter.19 Its provision for credit losses rose to $54.7 million, including a $17.0 million action on what it called its "stressed distillery portfolio."19 Annualized net charge-offs were 1.00% of loans held for investment, up from 0.80%, 0.63% and 0.48% in the three prior quarters.19 The production figure covers all of Live Oak's lending. Its SBA 7(a) volume for the fiscal year fell 9% to about $2.6 billion, American Banker reported.17
Why it matters: SBA 7(a) volume is down under tighter SBA rules, including a 9% drop at Live Oak. In our view, borrowers who no longer fit the SBA box are the ones most likely to show up in an alternative funder's pipeline.
The UK Financial Conduct Authority said on October 23 that six unregulated "Annex 1" lenders now operate under restrictions, imposed at each firm's request, that limit new customers and new lending, including extending existing credit.20 The firms are Kingscrown Finance, MOMSB, Momentus Capital, two Grosvenor Funding entities and Abbital. Most must commission an independent review of their anti-money laundering controls.20 The FCA is reviewing responses from around 900 Annex 1 firms. It told regulated firms dealing with them to confirm registration directly and check the information they provide independently.20 Trade coverage noted the February collapse of bridging lender Market Financial Solutions as background. The FCA did not link it to the six.21
Why it matters: if you buy participations from, or lend to, a lightly regulated lender, the FCA's instruction is a usable checklist: confirm its registration directly and check the information it gives you independently.
Activehours, the company behind the EarnIn app, sued Maryland Attorney General Anthony G. Brown and Commissioner of Financial Regulation Antonio P. Salazar in federal court in Maryland on October 20.22 The suit challenges SB 94, effective October 1, which bars earned wage access providers from accepting tips or giving consumers the option to tip.23 The state says Maryland users paid over $35 million in fees on 5.5 million transactions from 2019 to 2024.24 According to Fintech Business Weekly's account of the complaint, EarnIn argues the ban violates the First Amendment and asks the court to declare that tips and optional expedited fees are not interest.25 No ruling has been made.
Why it matters: this is a consumer case at the filing stage, but funders face a version of the same fight. When a court recharacterizes a merchant cash advance as a loan, the next question is which fees count toward the interest rate. In our view, any fee that counts is added to the rate a state usury cap limits, which is where a recharacterized advance can become unenforceable.
Sources
1 FOX 5 Atlanta | Newnan businessman sentenced to 15 years in $76M Ponzi scheme (Oct. 26, 2026)
2 The Citizen | Brant Frost IV sentenced to 15 years, $76.4 million restitution in First Liberty Ponzi scheme (Oct. 26, 2026)
3 Atlanta Journal-Constitution | First Liberty founder Brant Frost IV sentenced to 15 years in prison (Oct. 26, 2026)
4 U.S. SEC | Litigation Release No. 26358, SEC v. Edwin Brant Frost IV and First Liberty Building & Loan, LLC (July 22, 2025)
5 U.S. SEC | Complaint, SEC v. Frost and First Liberty Building & Loan, No. 1:25-cv-03826 (N.D. Ga., July 10, 2025)
6 U.S. Attorney, N.D. Ga., via FDIC OIG | First Liberty president charged with multi-million-dollar Ponzi scheme (Apr. 23, 2026)
7 Associated Press via KSAT | Federal officials say a prominent Georgia Republican was running a $140 million Ponzi scheme (July 10, 2025)
8 CBS News Atlanta | First Liberty founder sentenced to 15 years in prison, prosecutors say (Oct. 26, 2026)
9 The Newnan Times-Herald | First Liberty investors lost at least $66 million, receiver says (Aug. 10, 2026)
10 U.S. SEC | Litigation Release No. 24860, SEC v. Complete Business Solutions Group, Inc. d/b/a Par Funding, et al. (July 31, 2020)
11 U.S. Attorney's Office, E.D. Pa. | Par Funding CEO sentenced to 15 and a half years in prison (Mar. 26, 2025)
12 Legal Information Institute | Reves v. Ernst & Young, 494 U.S. 56 (1990)
13 Legal Information Institute | SEC v. W. J. Howey Co., 328 U.S. 293 (1946)
14 OpenJurist | SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973)
15 U.S. SEC | Private Placements, Rule 506(b)
16 U.S. SEC | General solicitation, Rule 506(c)
17 American Banker | SBA starts new fiscal year with even tighter credit box (Oct. 9, 2026)
18 Beyond Banks | SBA approved 21,881 fewer 7(a) loans (Oct. 10, 2026)
19 Live Oak Bancshares | Third quarter 2026 results, Form 8-K Exhibit 99.1 (Oct. 21, 2026)
20 Financial Conduct Authority | FCA restricts 6 firms following concerns over anti-money laundering controls (Oct. 23, 2026)
21 Alternative Credit Investor | FCA restricts six unregulated lenders over money laundering fears (Oct. 23, 2026)
22 CourtListener | Activehours, Inc. v. Brown, No. 1:26-cv-04396 (D. Md., filed Oct. 20, 2026)
23 Maryland General Assembly | Senate Bill 94 (2026 session), earned wage access tips
24 State of Maryland | Governor Moore signs Earned Wage Access and Access to Banking bills (Apr. 28, 2026)
25 Fintech Business Weekly | Is asking for a tip free speech? EarnIn says it is (Oct. 25, 2026)
