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Next, we're going to talk about fraud. Business and financial fraud in particular have been a recurring theme over the last decade or so - Enron, WorldCom, Bernie Madoff, the list goes on.

ROBERT SIEGEL, HOST:

Given the frequency of those scandals, psychologists have been trying to understand what happens in our minds when we're confronted with an ethical decision. What they've come up with is a radically different way to look at bad behavior.

To explain these ideas, NPR's Alix Spiegel and Chana Joffe-Walt have the anatomy of one fraud and what it tells us about why we do wrong.

ALIX SPIEGEL, BYLINE: Part of the reason it's so surprising that Toby Groves went to jail for fraud is that growing up he was one of those kids who took being good very, very seriously.

CHANA JOFFE-WALT, BYLINE: He did, especially after this one very formative experience he had as a young man. He was around 20 years old and at home visiting his parents outside Cincinnati.

TOBY GROVES: I'm walking through our dining room and I look out in the backyard. It was a beautiful day. And I look out and I see my dad doubled over. And he's shaking. And I think he's having a heart attack. So I run out and he's sobbing, sobbing uncontrollably.

SPIEGEL: Toby remembers grabbing his father.

GROVES: You know, what's wrong? And he just like thrust this paper - I didn't even know he had it - he just pushes it over, and it's the Cincinnati Enquirer and I open it up and there's my brother on the front page.

JOFFE-WALT: Toby's brother was almost 20 years older than Toby and worked at a local bank. He'd been successful - had been.

GROVES: It was a story about, you know, bank fraud. I don't remember the exact headline but, you know, our last name and fraud was in there. And that's all I needed to know.

SPIEGEL: Toby says he always had a difficult relationship with his brother. At least to Toby's thinking, his brother was a bad character - selfish and manipulative. So it was against this emotional backdrop that what happens next occurs. There in the backyard, Toby's father turns to him.

GROVES: He said promise me that you will never ever get in any trouble like this. And I did. I swore to him that I wouldn't.

SPIEGEL: So, like right there on the grass, he turns to you and he says promise me that you will never become this person?

GROVES: Yes. Yeah, we stood right there.

JOFFE-WALT: Now, for Toby, this was an easy promise to make. Toby, Toby believed, was fundamentally a good person. He could never get involved in fraud.

SPIEGEL: Which is why the addendum to this promise story is so very remarkable. You see, 22 years after his promise, Toby Groves found himself standing in front of the exact same judge who had sentenced his brother, being sentenced himself for the exact same crime: fraud.

JOFFE-WALT: And not just any fraud, a massive bank fraud involving millions of dollars that drove several companies out of business and resulted in the loss of close to a hundred jobs.

SPIEGEL: So what happened? Typically we think that unethical people do unethical things. But Toby, for most of his life, did not seem like an unethical character. A growing group of psychologists interested in ethics have been fascinated by people like Toby. And they're proposing a radically new way of explaining what drives people to do wrong - people like you and me, everyone.

JOFFE-WALT: So let's take a look at what happened with Toby because, really, if there was anyone you would think would not end up in prison for bank fraud, it would be Toby Groves.

KEVIN MOORE: People wanted to come to work for Toby Groves because of the kind of person that he was.

JOFFE-WALT: Early in his career, Toby founded a mortgage loan company and Kevin Moore, the guy you just heard, was a manager there. And Moore, like many others we talked to about Toby, says for years Toby had a reputation as an ethical, honest businessman.

We also talked to Jim Cergol, who was a loan officer at Toby's company.

JIM CERGOL: Our culture was if you do things right, you know, you'll be successful and there's no need to ever be dishonest. You knew you don't cross those lines.

SPIEGEL: But then in 2003, Toby says his business began to run into problems. Toby was expanding his company. There was a whole lot going on and he says he got distracted. So, the way he tells it, it was a shock when one night in 2004, he sat down at his computer to crunch some numbers and discovered that his fantastically successful company, it was a quarter of a million dollars in the hole.

Toby Groves.

GROVES: And I'm just - I'm blown away.

SPIEGEL: Toby decided that the best way to make up the shortfall was to take out a loan on his own house. There was just one problem with this: If he told the truth about his current income...

GROVES: I'm not going to get this loan if I state what my current income is because, obviously, my company right now is losing money.

SPIEGEL: So, Toby decided to lie on his loan application, tell the bank that he was making $350,000, when in reality he's making nowhere near that.

When you look back on Toby's story, this is his first bad act. But Toby says in his mind at the time, he didn't see that.

GROVES: There wasn't much of a thought process. I think it was - I felt like at that point that was a small price to pay and almost like a cost of doing business. You know, things are going to happen and I just needed to do whatever I needed to do to fix that. It wasn't - at that point I didn't think I was going to be losing money forever or anything like that.

SPIEGEL: Was it hard to put that number 350,000 in the box?

GROVES: No.

JOFFE-WALT: Now, at this point in Toby's story, I can see where he's coming from. He thinks if I just fudge the number a little, I'll fix this big problem. I'll save the company, save jobs. But what Toby did next, that I find much harder to understand.

SPIEGEL: See, Toby soon found more losses, huge losses. Toby had already mortgaged his house. But he says he felt he needed more money to save his business.

GROVES: My answer was to take an entirely false loan and pay off the mounting losses.

SPIEGEL: So, like, a loan to buy a house that didn't exist?

GROVES: Right. They call it an air loan.

JOFFE-WALT: How do you do that?

GROVES: You - basically you document a loan.

JOFFE-WALT: That is you fraudulently document a loan for a house that does not exist. You ask the bank to loan money to a made-up person, interested in living in a made-up house, and then use the money to cover up losses.

SPIEGEL: Problem was, to do this, Toby needed help; people on his staff, who could fabricate all of the documents needed. And so, one by one, Toby says he pulled employees into a room.

GROVES: I was really open about, you know, look, I screwed up. You know, if you will help me, great. If you don't, I understand.

SPIEGEL: So, essentially, you were asking people to do something which is illegal and immoral?

GROVES: Yes. Yeah, I did.

SPIEGEL: How did they respond?

GROVES: Maybe that was the most shocking thing. They - OK, we're in trouble and we need to solve this. I'll help you. Every single person complied. You know, I'll try to have that, you know - work on that and I'll try to have that for you tomorrow.

JOFFE-WALT: Every single person?

GROVES: Yeah. Every single person.

SPIEGEL: And did they say, I'm uncomfortable doing this. I don't - this is illegal.

GROVES: No.

SPIEGEL: Now, much of the people Toby is talking about here wouldn't talk to us. Of the four people at his company Toby told us about, only one, Monique McDowell, agreed to talk off-tape.

McDowell was intimately involved in fabricating documents and her description of what happened and how it happened completely conformed to Toby's description.

JOFFE-WALT: This is the part of Toby's story where you start to feel like, OK, this guy is a bad character. I would never do what he did. But the people Toby worked with, all bad seeds?

SPIEGEL: Well, you could argue that Toby was their boss and it's hard to say no to your boss. We actually put that to Toby.

GROVES: The thing is, it wasn't just people at - you know, at my company. We had to have assistance from other companies to pull this off.

JOFFE-WALT: In order to pull off this fraud, to make it look like a real person closed on a real house, Toby needed a title company to certify his fake documents, so after his staff was onboard, Toby says he made some visits.

GROVES: And it was the same thing. It was - here's what happened. Here's the only way I know to fix it and, if you'll help me, great, and if you won't, I understand. And nobody said, maybe we better think about this or - you know, within a few minutes, I had approval that they were - yes, I'll help you.

JOFFE-WALT: So now, we have people outside of Toby's company saying, sure, I'll help you do something completely illegal and wrong.

SPIEGEL: Again, we did contact several of the title companies. No one would talk, but it's clear from the legal case that title companies were involved. One title company president ended up in jail because of his dealings with Toby. Another title company agreed to a legal resolution. But here's the point: when we hear about cases of massive fraud, we tend to hear about the individuals, the Ken Lays, the Bernie Madoffs, the Toby Groves.

JOFFE-WALT: But for most big fraud scandals, you need large groups of people - auditors, regulators, staff - assisting in some way in the fraud. So to truly understand fraud, you have to understand two things. What's going on with the individuals we always hear so much about; the Tobys. But, also, you have to understand the helpers, the people who are willing to say: that immoral thing that you're doing right now - sure, I'll help you. Have that to you by Monday.

SIEGEL: Coming up, NPR's Chana Joffe-Walt and Alix Spiegel talk to economists and psychologists who are proposing a different way of thinking about why people go so wrong.

(SOUNDBITE OF MUSIC)

CORNISH: You're listening to ALL THINGS CONSIDERED from NPR News.

(SOUNDBITE OF MUSIC)

SIEGEL: From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

CORNISH: And I'm Audie Cornish. We return now to the story of Toby Groves, a man who pulled off a $7 million mortgage fraud. Again, here's NPR's Alix Spiegel and Chana Joffe-Walt to help explain why a man with good intentions could act so unethically and why so many people were willing to help him.

JOFFE-WALT: The story of Toby Groves didn't make headline news, but if it had - if you were sitting on your couch and the woman on TV told you about some guy who had defrauded banks of millions of dollars, you'd probably think something along the lines of...

LAMAR PIERCE: What kind of bastard would do this?

JOFFE-WALT: This is Lamar Pierce, an economist at Washington University in St. Louis, and Pierce says, when confronted with stories of people like Toby, the vast majority of us just assume we would never behave that way.

PIERCE: Eighty to 90 percent of people, I think, would say, I'm not capable of doing that and it may be higher.

SPIEGEL: And how many of them are wrong?

PIERCE: A large proportion, if not most people - you're wrong.

SPIEGEL: Pierce is part of a group of researchers arguing that your assumption that you would not do wrong is based on a flawed premise: the misperception that, when people like Toby face an ethical decision, they clearly understand the choice that they're making. Frequently, these researchers say, our minds simply can't fully process the choices that we are confronted with.

Now, psychologists have documented lots and lots of ways that our minds have trouble seeing or processing what is directly in front of us. Ann Tenbrunsel is a researcher at the University of Notre Dame and she gave us one very small example of this. It has to do with something simple - the way a decision is framed.

ANN TENBRUNSEL: The way that the decision is presented to me very much changes the way in which I view that decision and then eventually the decision it is that I reach.

SPIEGEL: Essentially, Tenbrunsel is arguing that certain frames make us blind to the fact that we are confronting an ethical problem at all. And, to prove this, she recently did this experiment where she got together two groups of people. One, she told...

TENBRUNSEL: Think about a business decision, think about what aspects are involved.

SPIEGEL: The others, she told to think about an ethical decision.

JOFFE-WALT: Then Tenbrunsel had her subjects do an unrelated task to distract them and presented them with an opportunity to cheat.

SPIEGEL: And those cognitively primed to think about business behaved radically differently from those who were not, no matter who they were or what their moral upbringing had been.

TENBRUNSEL: If you're thinking about a business decision, you are significantly more likely to lie than if you were thinking from an ethical frame.

SPIEGEL: According to Tenbrunsel, a business frame cognitively activates one set of goals - to be competent, to be successful. And, once you're in that frame, you're really focused on meeting those goals, and other goals, like ethics, can completely fade from view.

Tenbrunsel listened to Toby's story and she argues that one way to understand Toby's initial choice to lie on his loan application is to consider the cognitive frame that he was using.

TENBRUNSEL: His sole focus was on making the best business decision.

SPIEGEL: Now, obviously, we're never going to know what was actually going through Toby's mind and the point of raising this possibility is not to excuse Toby's bad behavior, but simply to demonstrate in a small way this very uncomfortable argument that these psychologists are making, that most people don't necessarily intend to do bad. It's that they have these huge cognitive blind spots which make it difficult for them to see what they're doing as unethical, even when it is profoundly unethical. A lot of fraud is unintentional.

JOFFE-WALT: Which might help explain the first part of Toby's story, how a man who swore to his beloved father to be ethical broke that promise. But why would his staff and title companies help him? That is something Toby himself seemed shocked by.

GROVES: It spread so easily. So many people did things and it's - I don't believe it's because I'm some genius criminal mastermind. I really don't understand how it could be that easy.

JOFFE-WALT: Typically, when we hear about large frauds, we assume that financial incentives drove the behavior because it's very clear, whenever there are financial incentives to cheat, you will see some cheating.

But this group of psychologists are interested in another possible explanation. Human beings commit fraud because human beings like each other. We like to help each other, especially people we identify with.

SPIEGEL: Lamar Pierce from Washington University points to the case of emissions testers to explain this. Emissions testers are supposed to fail cars that are too polluting to stay on the road, but in many cases, emissions testers simply lie.

PIERCE: Somewhere between, you know, 20 and 50 percent of cars that should fail are passed, are illicitly passed.

JOFFE-WALT: How come? Pierce and a psychologist from Harvard, Francesca Gino, collected hundreds of thousands of records and they were actually able to track the patterns of individual inspectors. Here's what they found.

If you pull up in a BMW and your car is polluting the air, you are likely to fail, but Francesca Gino says pull up in a Honda Civic and you have a much better chance of passing. Why?

FRANCESCA GINO: We know from a lot of research that, when we feel empathy towards others, we want to help them out.

JOFFE-WALT: Emissions testers who generally make a modest salary see a Civic and identify. They feel empathetic. Essentially, Gino and Pierce are arguing that these testers commit fraud not because they are greedy, but because they are nice.

PIERCE: And most people don't - and this is really fundamentally the problem - most people don't see the harm in this.

JOFFE-WALT: Pierce argues that emissions testers can't actually process the costs of this decision in the moment. We're just not cognitively designed to do that. The cost is so abstract, they're literally being asked to weigh the global environment against the benefits of passing someone who is right there, who needs help.

PIERCE: I've never talked to a mortgage broker who thought, you know, when I help somebody get into a loan by falsifying their income, I deeply consider whether or not I would destabilize the world economy. You're helping someone who's real and that I care about.

JOFFE-WALT: Gino and Pierce argue Toby's staff were faced with the same kind of decision - future abstract consequences or help out the very real person in front of them. And so, without focusing on the ethics, they helped out a person who was not focusing on the ethics either, and together they perpetrated a $7 million fraud.

SPIEGEL: In 2006, that fraud was actually discovered. FBI agents showed up at Toby's office and he says he quickly confessed. Two years later, he was in jail, grateful that his father wasn't alive to see him, wondering how he had gone so wrong.

GROVES: Was I just a bad character? Was it - I mean, did I know myself? You know, the last thing I ever wanted to do in my life would be to break that promise to my dad, so those were things that haunted me every second of every day.

SPIEGEL: Now, if these psychologists and economists are right, if we are all capable of behaving profoundly unethically without realizing it, then there are some concrete changes we could make to our workplaces, to our regulations, changes that would take into account how our minds actually work.

JOFFE-WALT: For example, we know auditors develop relationships with clients after years and years of working together. We also know those relationships can corrupt their audits without the auditors necessarily even realizing it. So you could force businesses to switch auditors every couple of years.

SPIEGEL: And there are other proposals or, you know, we could just keep saying what we have been saying, that right is right and wrong is wrong and people should know the difference. I'm Alix Spiegel.

JOFFE-WALT: And I'm Chana Joffe-Walt, NPR News.

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