ROBERT SMITH, BYLINE: Hey everyone, on this 4th of July holiday, we wanted to bring you one of our favorite episodes we've ever done. It comes from reporter Alix Spiegel of Invisibilia fame, and Chana Joffe-Walt, now with This American Life. The episode is about this grand old American tradition...
CHANA JOFFE-WALT, HOST:
Fraud. Fraud is something the media loves to cover, and we all love to talk about it. And on the business financial beat, fraud, you may have noticed, has become sort of a theme.
(SOUNDBITE OR NEWS BROADCASTS)
UNIDENTIFIED REPORTER #1: The government says Enron was a ticking time bomb.
UNIDENTIFIED REPORTER #2: It took a federal jury eight days of deliberations.
UNIDENTIFIED REPORTER #3: The former WorldCom CEO sat calmly in court as the verdict was read - guilty on all counts.
UNIDENTIFIED REPORTER #4: Bernie Madoff, whose Ponzi scheme robbed investors of $20 billion.
ALIX SPIEGEL, HOST:
So we had Enron, we had WorldCom, we had Madoff. And in the wake of all these scandals, and Enron in particular, psychologists and economists got really interested in unethical behavior in business, and they spent some time thinking about what exactly happens in our minds when we are faced with an ethical decision. And what they're proposing is a radically different way of looking at bad behavior. So traditionally when we think about bad behavior, we think about it as being tied to character. But they're arguing that character doesn't explain it all. They're saying that our minds are kind of limited in a way that makes it hard for us to make ethical decisions.
(SOUNDBITE OF FEIST SONG, "THE BAD IN EACH OTHER")
JOFFE-WALT: Hello and welcome to PLANET MONEY. I'm Chana Joffe-Walt.
SPIEGEL: And I'm Alix Spiegel. I cover psychology for NPR, and today I am bringing the psychologist to the show.
JOFFE-WALT: We are very excited to have you guest host, Alix. And on today's show - this is a story you and I have been working on for quite a while. We are going to try to explain why people do bad things.
SPIEGEL: That's right. We are going to take all of the traditional answers to that question - why people do bad things - and we're going to throw them away and we're going to propose new ways to explain our bad behavior.
UNIDENTIFIED WOMAN: Support for this podcast come from Scion. Scion has teamed up with the founders of Kickstarter, Threadless, Sprinkles Cupcakes and more for the Scion Motivatour, a program dedicated to entrepreneurs. Episodes and event information can be found on scion.com/motivatour. That's M-O-T-I-V-A-T-O-U-R.
JOFFE-WALT: So on to today's show. We're going to look at the anatomy of one fraud, one fraud perpetrated by a man named Toby Groves.
SPIEGEL: And Toby Groves is an instructive case because really, if there is ever a person who seemed like he would never commit fraud, it would be Toby Groves.
JOFFE-WALT: Yeah. I mean, especially when you look at what happened to Toby when he was a young man. He had this very formative experience around 20 years old. He says he was home in Cincinnati for a visit with his parents.
TOBY GROVES: I was walking through - I can picture this - 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, and sobbing uncontrollably.
SPIEGEL: Toby remembers running out and grabbing his father, begging his father to explain, you know, what's happening.
GROVES: So I'm grabbing onto him, you know, what's wrong? What do you need? How can I help you? 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 he worked at a local bank. He'd been successful - had been.
GROVES: It was a story about 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: To give you a little more background, Toby says that he always had a really difficult relationship with his brother. You know, at least in Toby's way of thinking, his brother was a bad character. He was a selfish and manipulative guy. So it was against that 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, again we should say, for Toby this was an easy promise to make. Toby, Toby believed, was a fundamentally good person. He grew up on a farm, a very religious family. He could never get involved in something like fraud. It wasn't even a question.
SPIEGEL: Which is why the addendum to this story is so very remarkable. You see, 22 years after this promise to his father, 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 about a hundred jobs.
SPIEGEL: OK, so how did this happen? In the beginning, according to everyone that we talked to about Toby Groves, he was a completely upstanding businessman. He founded a mortgage company in Cincinnati - I think it was, like, the early '90s. This guy Kevin Moore was a manager there.
KEVIN MOORE: People wanted to come to work for Toby Groves because of the kind of person that he was.
JOFFE-WALT: We talked to another guy, Jim Cergol, who was a loan officer at the 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: And for years, through the early 2000s, Toby's mortgage company prospered. But then in 2003, Toby says his successful business began to run into problems. What he was trying to do was expand it and also kind of start up this side business. And at some point, he says, he lost track of things. And then one night in 2004, Toby says he sat down at his computer to crunch some numbers, and what he discovered that night was that his fantastically successful business - well, it was no longer so fantastically successful. In fact, it was a quarter of a million dollars in the hole. Here's Toby.
GROVES: And I'm just - I'm blown away.
SPIEGEL: So to fix this, Toby decides to take out a home equity loan on his own property. And really, this is where Toby does his very first unethical act.
JOFFE-WALT: Yeah. When Toby sat down and was filling out his loan application, he knew he wouldn't get the loan if he was honest about his income. His business was doing terribly. So Toby decided to lie on his loan application, to tell the bank that he was making $350,000 when in reality he was making basically nothing.
SPIEGEL: This is the moment that actually kicks-off every fraud story, the moment that the first lie is made, the moment we all wonder about when we read about fraud scandals - you know, what were they thinking?
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.
JOFFE-WALT: Was it hard to put that number, 350,000, in the box?
JOFFE-WALT: Alix, I have to say, at this point in talking to Toby, I felt like I can see where he's coming from. You know, you think, I'm just going to fudge the number here a little bit and it's going to fix a big problem. It's going to save my company, save jobs.
I'm not saying I would do it, but I can totally see where his thinking goes. But what Toby did next - that is where it starts to feel harder to understand. Because Toby got to a point where he couldn't solve the problem by himself - he had to bring in other people.
SPIEGEL: Yeah, Toby's lie got him a loan to cover up some losses, but Toby says, as the weeks went on, he found more losses. He had already mortgaged his house. But from his perspective, he needed more money to save his business.
GROVES: My answer was to take an entirely false loan and pay off the mounting losses.
JOFFE-WALT: 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. The bank gives you that money and you use it to cover up those losses.
SPIEGEL: The thing is, Toby didn't really know how to do this. You literally have to manufacture, from thin air, borrowers and homes and the paperwork to go with them, and that was outside of his skill set. He needed help, and he had people on his staff who knew how these loans documents should look and could fabricate the documents. 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. And essentially, you know, if you will help me - great. If you don't, I understand.
SPIEGEL: So essentially you are asking people to do something which is illegal and immoral?
GROVES: Yes. Yeah, I did.
SPIEGEL: How do 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, I'll 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?
SPIEGEL: Most of the people Toby is talking about here wouldn't talk to us because they didn't want to expose themselves to legal problems. Of the four people at his company that Toby told us about, we were able to speak about the fraud with only one, a woman on staff named Monique McDowell who was intimately involved in fabricating these documents, and her description of what happened and how it happened completely conformed to what Toby told us.
JOFFE-WALT: So at this point, we have a man who has lied on a mortgage application himself and then decided that he needs to fabricate many, many mortgage applications for totally made-up houses, and that he can't do it on his own, he needs to bring in people who work for him and get them to lie on his behalf. So at this point you may be thinking...
LAMAR PIERCE: What kind of bastard would do this?
JOFFE-WALT: This is Lamar Pierce. He's an economist at Washington University in St. Louis, and he is one of several academics studying people like Toby - people in organizations who make unethical decisions - and trying to figure out why they do the things that they do. And Pierce says, when confronted with these stories of people like Toby, the vast majority of us instinctively make two assumptions right away. First, we assume that the character of the person was flawed in some way that enabled them to do what they did. And second, we assume we would never behave that way.
SPIEGEL: If you had to guess, like, how many people listening to us right now believe that they are not capable of that kind of unethical behavior, what would your guess be?
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: For a large proportion, if not most people, you're wrong.
JOFFE-WALT: Pierce and this group of researchers argue 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 are making. And frequently, these researchers say, our minds actually can't fully process the choices we're confronted with.
SPIEGEL: Now, psychologists have documented lots and lots of different ways that our minds have trouble seeing or processing what is directly in front of us. Ann Tenbrunsel is one of the people who's been working on this. She's a researcher at Notre Dame who's been looking at unethical business behavior. And she gave us one very, very small example of this. She says it has to do with this very simple thing, which is the way that 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: Basically, Tenbrunsel is arguing that certain frames can actually make us blind to the fact that we are confronting an ethical problem at all. Now, 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 other she told to think about an ethical decision, something people had recently faced. So after she did that, Tenbrunsel had her subjects do an unrelated task to distract them. Then she presented them with an opportunity to cheat. And those who had been cognitively primed to think about business, they behaved radically different 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, what happens is that a business frame cognitively activates one set of goals, you know, to be competent, to be successful. Ethics activates a different one. And once you're in, you know, one of those frames - let's say you're in a business frame, you become really, really focused on meeting those goals, and all of the other goals, like ethics, can completely fade from view. Tenbrunsel actually 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 are never going to know what was actually going through Toby's mind. And the point of raising this possibility, it's not to excuse Toby's bad behavior. It's just to demonstrate in a very, very small way this very uncomfortable point that these people are making, that frequently people - including all of you listening to my voice right now - are genuinely unaware that they are making a profoundly unethical decision. It's not that they're evil, it's that they cannot see. They're focused on another set of goals. And this doesn't mean, by the way, that there aren't bad people who intentionally set out to do bad things. What the researchers are arguing is that that is a minority of the case and if you want to attack fraud, you really have to understand that - that a lot of fraud is unintentional.
JOFFE-WALT: That idea might help explain the first part of Toby's story, this big question, you know, how you end up with a man who has sworn to his beloved father to be ethical go on to break that promise. But there is another big puzzle in Toby's story 'cause remember, it wasn't just Toby that was creating those air loans, it was people at his company, too.
SPIEGEL: And actually, it wasn't just people at his company lying on his behalf. That wasn't the end of it. Here's Toby.
GROVES: I mean, we had to have - we had to have assistance from other companies to pull this off.
JOFFE-WALT: In order to pull off this fraud, to pull off the air loans and make it look like real people closed on real houses, Toby needed help from his staff to create fake documents. And then he needed a title company to sign papers certifying those fake documents. So after he got his staff on board, 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. They were, yes I'll help you.
SPIEGEL: So now we have people outside of Toby's company saying, sure I'll help you do something that is completely illegal and wrong, which I've got to say, Toby himself seemed completely 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 mean, that's what kills me. I really don't understand how it could be that easy.
SPIEGEL: By the way, we did contact several of the title companies, but no one would speak to us. It is clear though from the legal cases that title companies were involved. One title company president ended up in jail because of his dealings with Toby. There was another title company that agreed to a legal settlement. But here is the point. When we hear about cases of massive fraud, we tend to hear about the individuals. We hear about the Ken Lays, the Bernie Madoffs, the Toby Groves.
JOFFE-WALT: But most big fraud scandals could not have happened without a large group of people. You know, you need auditors and regulators and staff assisting in some way in the fraud. So to truly understand fraud, why it happens, why it happens so much, you have to understand two things. You need to look at the individuals, as we just did with Toby. But you also have to understand the helpers - the people out there who are willing to say, that illegal, immoral thing you're doing right now? Sure, I'll help you. I'll have that to you by Monday.
SPIEGEL: And we know that financial incentives can explain some of this helping behavior, like, big shocker - money can motivate some people to cheat. But these psychologists and economists say that doesn't fully explain it. They're interested in another possible explanation, which is that human beings commit fraud because human beings like each other. We like to help each other, especially people that we identify with.
JOFFE-WALT: Lamar Pierce from Washington University, you heard from him before, he points to the case of emissions testers to explain this. So emissions testers are supposed to test whether or not your car is too polluting to stay on the road. And if it is, they're supposed to fail you. But in many cases, emissions testers lie.
PIERCE: Somewhere between, you know, 20 and 50 percent of cars that should fail are passed, are illicitly passed.
JOFFE-WALT: Pierce and a psychologist from Harvard named Francesca Gino collected hundreds of thousands of records and were actually able to track the patterns of individual inspectors; carefully monitoring who they approved and who they denied. And here's what they found. If you pull up in a Ferrari and your car is polluting the air, you're likely to fail. But Francesca Gino says pull up to an emissions tester in a Honda Civic, and you have a much better chance of passing. Why?
FRANCESA 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, in general, make a modest salary, they see a Civic, and they identify with the driver. They feel empathetic. Essentially, Geno and Pierce are arguing that these testers commit fraud not because they are greedy, but because they are nice. Here's Lamar Pierce.
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 cost of the decision in front of them in that moment. We're not cognitively designed to do that. The cost is so abstract. It's the global environment. They are literally being asked to weigh the global environment against the benefits of passing someone who's right there who needs help.
PIERCE: I've never talk to a mortgage broker who thought, you know, when I help somebody get into a loan by falsifying their income, you know, I deeply consider whether or not I would destabilize the world economy. And you're helping someone who's real.
JOFFE-WALT: Gino and Pierce argue that the people who helped Toby were faced with the same kind of decision - future abstract consequences or help out the very real person in front of them. And so they helped out the very real person in front of them without really seeing the harm in doing it. Without focusing on the ethics, they helped out a person who was not focusing on the ethics either. And altogether, they perpetrated a $7 million fraud.
SPIEGEL: So how does this story end for Toby? In 2006, two FBI agents showed up at Toby's office. And he says he quickly confessed everything because at that point, he just wanted it to be over. About two years later, he found himself standing in front of the exact same judge who had sentenced his brother. And a short time after that, he was in jail; grateful that his father wasn't alive to see him but wondering, you know, how he ended up where he did.
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 that we talked to are right, if we are all capable of behaving in profoundly unethical ways without realizing it, then there are some concrete changes that 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 that auditors develop relationships with their customers over years and years of auditing the same company. And since we know that those relationships can, over time, corrupt the auditors' audit without the auditors even realizing that's happening, we could force businesses to switch auditors every once in a while to prevent that situation from happening. Or, you know, you could put a sentence at the beginning of every business contract that said something like lying on this contract is unethical and illegal just to sort of put the person's mind in that ethical frame when they're signing the document.
SPIEGEL: And there are other proposals on the table. Or we could just keep saying what we have been saying, that right is right and wrong is wrong, and people should know the difference.
(SOUNDBITE OF SONG, "THE BAD IN EACH OTHER")
FEIST: (Singing) Bring out the worst in the other, the bad in each other.
JOFFE-WALT: As always, we want to hear what you think. You can email us at firstname.lastname@example.org. You can find us online at npr.org/money, on Tumblr, Facebook, Twitter, all of those things. I'm Chana Joffe-Walt.
SPIEGEL: I'm Alix Spiegel. Thank you for listening.
(SOUNDBITE OF SONG, "THE BAD IN EACH OTHER")
FEIST: (Singing) ...When we've become two fluorescently blue down the neon river. The sadness canoes either without or with her. When a good man and a good woman can't find the good in...
[POST-BROADCAST CORRECTION: In this story, we refer to Toby Groves' lie in 2004 on his mortgage loan application as "his first bad act." We should have noted that according to court records, Groves admitted that he began the "scheme" to defraud banks "on or about June 20, 2003." In addition, court records show he was ordered to pay the federal Internal Revenue Service $299,997 after pleading guilty to tax evasion as part of the fraud scheme.
Also in this story, Groves discusses what he sees as a key moment in his life — his brother's 1986 bank fraud conviction. Groves describes what he says was his father's anguish over a front-page newspaper story. Our Web coverage includes illustrations that make it appear as if a photo of Groves' brother was on the front page and that the family's name was in the headline. But archives show that the Cincinnati Enquirer's coverage did not include a front-page image of Groves' brother. The family's name was not in the headline. Instead, the brother's name appeared inside the newspaper. The illustrations also showed a fictional newspaper with a front-page headline reading 'Toby Groves Found Guilty Of Bank Fraud.' To be clear, Groves’ guilty plea was never front-page news.
The details about others in this report — including researchers Lamar Pierce, Francesca Gino and Ann Tenbrunsel — are not in question.
Update on June 27, 2019: This correction has been edited to note that court records show Groves admitted he began the "scheme" to defraud banks "on or about June 20, 2003," not June 30, 2003. Also, it has been edited to make clear that he was ordered to pay $299,977 to the Internal Revenue Service and to clarify that the illustration of a fictional "Daily Paper" with the headline “Toby Groves Found Guilty Of Bank Fraud” does not depict an actual front page.]
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