Brokerage on the Brink

[MUSIC] Back in 1990, Toby Groves did what a lot of people want to do. He started his own company. He had studied business management in school, became a certified public accountant, and eventually opened up a mortgage bank. So it was Groves funding corporation that was named after me. [MUSIC] Now, let's say you want to buy a house. Nobody really has all the cash needed to purchase a house outright. So you need help covering the cost. You go to a mortgage banker like Groves funding. They lend you money using the house you're buying as security. And of course, this is known as a mortgage. Now we got to break this thing down a little bit because all of this financial stuff gets somewhat complicated for me at least. Groves funding work like any other mortgage lender. The company got the money that they lent to borrowers through what's called a warehouse loan, which is a line of credit issued by a bank. Think of a warehouse line like a giant credit card with a $50 million limit. Now, Groves funding secures the money from the bank for a home buyer. Then they package that loan with a bunch of other mortgages, sell them on the market, and then use that money from the sale to pay back the warehouse line right away. The market would dictate the price and the difference between what they sold alone for and what they borrowed from the warehouse lines was their income or loss. In the early 2000s, the housing market was booming. The company's headquarters in Cincinnati, Ohio grew and Groves opened up locations in Denver, Houston, and Fort Myers. At the company's peak, around 100 employees worked at Groves funding. A manager who worked for Groves once told a radio show that people came to Groves funding because of the type of person Toby Groves was an honest businessman. I felt confident that my system was too perfect to fail. That's until one day in 2004. I had a habit at the end of every day, kind of walking around the office, looking through things. Toby says down at his computer, like normal, to go over the company's numbers. And he discovers that the company was in serious trouble. A $250,000 lost. $250,000 in the whole. What was going through your mind when you recognized that, "Shit, we're in trouble." This has to be fixed. First, you get the money back in and then you figure out how this mistake happened. When you're thinking about this, what potential solutions are coming to your mind? I thought we've been in business at that point for about 15 years. We're going to have the money we can pull from somewhere. And when I looked, we didn't. Turns out, Toby's company hadn't made any money in a while. One by one, loans were getting denied and he didn't know why. But employees were still getting paid. That's because the money was coming from a different account. One, it shouldn't have been coming from. So basically, grows needed to get a quarter of a million dollars to cover this debt ASAP. So my mind went to where can I get this? And I thought of borrowing on my own house. I'm pulling the equity out and putting that into the accounts to make it whole. Toby goes into work the next day and tells his manager everything. He needs their help. And pretty quickly, a manager sees an issue with his plan. These managers, they know mortgages inside and out. And they remind me, while you live on a working farm, Toby, it's going to take weeks to get funding for that because you're going to have to get multiple appraisals. But one manager had a solution. They offered to take out a loan on their residential home. And they knew it go through because it was their job to approve loans for the company. All the company needed to do was pay back the warehouse line within 60 days and no one would be the wiser. The money came through that afternoon. Toby is relieved until he looks at the paperwork that came with the loan. And then he realized they had a whole new problem. We had just made a $250,000 first mortgage on a property that was worth about $325,000 that already had a $275,000 first mortgage on it. See, the thing is, it's illegal to take out a mortgage that is worth more than the total value of the property. And if you do some quick math here, those two loans together, well, they added up to way more than $325,000. So now we have fraud. So this is how you got yourself in the tickets of this mess. Well, yeah, I mean, this is only the beginning of it. Oh yeah, this is just the tip of the fraud iceberg. This week on Cheat, we look at white color crime through a company pushed to the brink. So hold on to your hat folks. This is going to be a doozy. Every human being fantasizes, maybe imagines hitting the lot of possibly finding that lover they've always dreamt of or perhaps carrying out a diabolical murder in the most brutal way imaginable. Dr. Swartz was based down in a pool of blood. A renowned scientist killed in a murderous frenzy, a very gruesome and disturbing scene. Persons of interest obsessed with role playing and the occult and at the center of it all, a twisted leader called the Lord of chaos and a killer hiding behind a mask of sanity. We're here now. I can smell blood. From Sony music entertainment and M William Phelps LLC fatal fantasy available now on the binge search for fatal fantasy wherever you get your podcasts to start listening today. Toby grows just committed fraud. I mean, all he wanted to do was stop his company from tanking, but this wasn't right. The next day, Toby starts the process of mortgaging his farm to pay off the fraudulent loan. He informs his managers of his new plan and they then at that point speak up and say, "You know, what are you going to put down as your income?" And I said, "You know, what do you mean?" Yeah. So the managers remind him that he doesn't make enough money to take out a loan on his farm. After all, the company was in debt. So Toby needed to lie about his income, which is also fraud. And he does it. It was the best option of terrible options. So if I didn't do it, what was going to happen? The company was going to go under what's going to happen to all the borrowers. All these people closing on these loans, they're walking in and out of our offices with their kids, you know, excited about their new house and then there's all of these employees, what's going to happen to them? And it felt to me like I would be able to fix everything. He thought that he'd just do one, okay, maybe two teensy little crimes, you know, all for a good cause. He would save the company, save people's jobs and everything would get back on track. At least that's what he kept telling himself. I'll report this to the auditors and they'll understand that I had to do it. He only owed $250,000. I mean, that sounds like a lot of money to me, but if you're dealing with hundreds of thousands of dollars in loans every day, that amount doesn't actually feel like so much. It wasn't an amount of money that I thought, oh my god, I don't know how I'd ever get this much money. I thought I couldn't. It was your employees that made you aware of the fact that you don't have the income to list on this application that would grant you the loan. So when you went forward and lied on the application, how did your employees respond? There was not a lot of talking going on about that, but they supported it. Nobody said anything like, I don't know if you should do this. So Toby goes ahead and lies about his income. He takes out the loan on his farm and weeks later, the money comes in. Now he could finally wrap this all up. I have the $250,000 and I'm just so relieved. I'm so relieved. And like all I have to do is go in and take this $250,000 and put it over into this account. And this is over. Never to be thought about again. I mean, if that's possible, but that's not what ended up happening that day. Toby rushes to the office. Finally, he can get the company back to square one and no more fraud. This was just all a blip, all a little blip. He gets to the office and finds there's another problem waiting for him. An accounting manager had found more losses. I found out that we had another slightly more than $250,000 of losses. Another $250,000 in losses. So now we're dealing with $2,250,000 losses. This guy just keeps losing money all over the place. Like, how did this happen? To answer this question, we got to go back to how the company works. You see, as part of the mortgage process, Toby's company provides all the documents needed to help you complete a mortgage loan. At some point though, the requirements on those papers change. And if the paperwork isn't up to date, the loan will get denied by the Department of Housing and Urban Development, also known as HUD. But if the loan doesn't go through, HUD sends back the insurance premium. This is what the potential homeowner pays when going through the loan process. And since Groh's paperwork was outdated, HUD had been denying loan after loan, which meant that the insurance money, the potential homeowner's scent, was refunded by HUD and put into an escrow account. Now, here's where a thing going wrong really went wrong. Since the company was pretty much broke and wasn't making any money, payroll started getting pulled from escrow, meaning the company was spending money that wasn't theirs to cover payroll. It was just a matter of a few days that so much of this had come in that it caused a kind of perfect storm of errors. It just wasn't avalanche of those that happened all of a sudden. So Toby now has an additional $250,000 in losses. Plus, a $250,000 loan taken out fraudingly to cover the first $250,000 he found in losses. So now I have to make a choice. Do I put the $250,000 towards these new losses? Or do I pay off the fraudulent loan? This dude is trying to catch a fall in life. He's got to do something. The company is floundering and he makes his choice. I decided that the urgent thing to do was again to put the money back into the escrow account. So now I still have this $250,000 fraudulent loan. And you don't have another farm? Nope. No. So you still have this fraudulent loan that needs to be paid off. Were you able to figure out a solution for that? Yes, but it was a an even worse solution. A worse solution. How could it get worse than this? Find out after the break. Hey, you didn't hear this from me, but normal gossip is back for its ninth season. Join me, Rachel Hampton, as I share the juicy gossip from the real world with some very special guests. This season we're bringing back some old friends, a radio topia buddy, and for the first time ever a Nobel laureate. That's right. We have Malala on season nine. Normal gossip is out on all your favorite podcast platforms. Every human being fantasizes. Maybe imagines hitting the lotto, possibly finding that lover they've always dreamt of. Or perhaps carrying out a diabolical murder in the most brutal way imaginable. Dr. A renowned scientist killed in a murderous frenzy. A very gruesome and disturbing scene. Persons of interest obsessed with role playing and the occult. And at the center of it all, a twisted leader called the Lord of chaos and a killer hiding behind a mask of sanity. We're here now. I can smell blood. From Sony music entertainment and M William Phelps LLC, Fatal Fantasy, available now on the bench. Search for Fatal Fantasy, wherever you get your podcasts to start listening today. In just a few weeks, Groves funding found itself half a million dollars in debt and its employees had taken out two separate fraudulent loans to try to get themselves out of this mess. But at Groves funding, you may remember the warehouse line, aka the banks, had to be paid back within 60 days. By the time Toby used the farm loan to pay off the second set of losses, he only had three days to pay off the first fraudulent loan. Before auditors are picking it up and looking at it, which of course we didn't want to have happen. Three days just wasn't enough time to come up with the money. Toby calls his team into his office. And I tell the managers, it's white flag time I give up, I don't have the constitution to handle this. And as they said, what's that? What are you telling us? I said we're closing the company. I mean, we're out of business in three days. The idea came up, it's like, well, you know, what if you had a little more time? What if you had more than three days, could you do anything? Like, ah, no, I, no, I don't think so and I don't have more than three days. This doesn't sound like it's going to a good place. No, it's going to a bad place. They decide to change the name on the loan so it looks like a completely new loan to buy them another 60 days. For example, let's say the fraudulent loan was called the Smith loan and they renamed it the Jones loan. The Jones loan would look like a completely new loan and thus give Toby 60 more days to pay it off. At first, Toby's not really into the idea. Like, how would they even pull this off? I remember at one point saying, you know, the hell no. First of all, we'd have to falsify all of these documents and what are we going to do, you know, use white out? We get caught like little school kids. And I said, there's no way it's going to work anyway and it's fraud to which they didn't chuckle but I think they wanted to because they're like, Toby, we already have fraud. I mean, they got a point. Bro, you're already deep in it and the managers, they tell them that they're just trying to help. They're trying to fix this problem. But Toby doesn't see a way to do it without being super obvious. That's when another employee pipes in. He says he can help using a special software to alter the loan documents. Yeah, this does sound like a really good idea. He said, I have this, the software that I can sample the background and the type set and I could type back in over something and you would never know. And either would anybody else? Wait a minute, Toby. I got to ask, why are all of these employees so excited to engage in fraud with you? Well, I mean, they definitely weren't excited. I mean, it was gnashing of teeth. They were tears. But they all think they're so close. All they need is another $250,000 and then this entire headache can go away. I mean, it's still a manageable amount of money, right? 60 more days, enough time to get it. Get the company back to zero and just start fresh. Put this whole thing behind us. And after some discussion and hand-ranging, Toby goes ahead with the plan. Groves employees puts this Jones loan out on the warehouse line and hope it looks like a completely new one. And we cross our fingers. Toby is a wreck that night. He can't sleep, he's stressed, but if it works, at least he has a shot and making it all go away. The next day, he comes into the office and he finds out that the loan name change worked. He has 60 more days, but he needs money fast. My answer was to start trying to sell things and just come up with the money. Do whatever failure at that point was not an option. If I could sell myself for medical experiments, I mean, anything that I could do to make this work out, I was going to do. Toby makes about $70,000 selling things off of his farm. His mom even takes out a mortgage to help him pay off the rest of the loan. So ended up borrowing $180,000 on her house, which gave me the $250,000 I needed. Just in the nick of time. Everyone banded together. Toby's managers, his mom, all to help Toby in his company. Yeah, some of it was illegal, but it was just temporary. And yeah, it hadn't gone its plan, but perhaps they could climb out of it now. With just days to spare, Toby raises the $250,000 to pay off the loan he owes the company. He's feeling good. He goes to work, walks through the glass doors to the back where the executive offices are. And there he's greeted by walls covered in paper, like up on the walls from floor to ceiling. And I see some of it has highlighter across it. And I'm like, what the what what is that? The accounting manager that found the second $250,000 in losses, walks up behind Toby as he's looking at the paper. She kind of startles it. They're like, oh my god, Toby don't you know what that is? No, I don't. And as I got closer to it. And she said, did you forget? I said, forget what? Oh my goodness, Toby. So she tells him that there were outdated documents that didn't get fixed in time. And so investors weren't willing to pay the full price for them. But the company still needed to make money. So during all the panic, some of the managers had start selling the impaired loans for less than they were worth. And I realized immediately that that meant dozens, if not potentially hundreds of transactions, where we had sold them at a five or $10,000 loss per transaction. This had been going on for months. Basically, ever since they turned that first fraudulent loan from the Smith loan to the Jones loan. So in desperation and perhaps with some inspiration from their boss, managers, people in sales, even the IT person, they took out fake loans. Basically, they renamed loans to look like properties were resold or they fake names of people with real addresses. They did this to take out money from their warehouse line in order to pay back their debt to the banks on the warehouse line. This is known in the biz as loan cighting. Toby says outside title companies were in on a two because they were the ones who had to sign off on the fake loans. He believes upwards of 200 people were involved in the scheme. Loan cighting sounds confusing, but it's basically like paying a credit card off with a new credit card. You save one interest and it buys you more time, but you're never really paying off the debt. It's a ruthless circle. Toby continued to stare at the paper. He's processing all of this. And I said, "Are you telling me that all of these highlighted transactions are fake?" And she said, "Yeah." And I added them all up and it came to about two million dollars. The company is way more screwed than Toby thought. Now, they're two million dollars in the whole and there's no way that he was getting out of this one. I really went numb. There's no appropriate way to describe just how awful it was. I had no idea what to do. The depression was, I mean, it really it went from living through a month to living through a week to living through a day. And now we're hour by hour whether I'm going to be on this earth, you know, for the next hour. For the next year and a half, things are bad. Toby's health takes a term for the words. He stops going into the office and drinks a lot. I can't sleep. I had lost weight. I can hardly, you know, if I drive somewhere, I don't even know how I got there. I can't take it. I had nightmares. I guess you'd call them night terrors. I got to the point where I was afraid to go to sleep. Really just afraid to be alive. Toby just kind of shuts down. In the dead, it just keeps piling up. Meanwhile, his employees keep stalling for time on the fake loans by changing their names to new ones, like Toby did with the Smith loan. New fake loans were made to pay off the accruing interest from kind of loans. So what started out as one or two loans turned into 15 and then 20. Every 60 days, they would just roll those loans over and over and over. And of course, then there's interest on these millions of dollars. So it keeps going up and up until the amount owed was about eight and a half million dollars. Clearly there are so many issues here that would lead to your existence being as you described, but it was part of that just anticipating at any day that the shoe could drop on all of this. Oh yeah, I prayed that it would. I prayed every day that it would. In 2006, his prayers were answered. That's after the break. Sabrina, Karen, I have been listening to a new show from the binge called Fatal Fantasy. I am obsessed. Wait, I need to know more. Tell me everything. I, well, so it's very shocking. It's just like ultra weird crime story of a murder for a higher plot that yeah, wait for it. Leverage the dynamics of the underworld and underworld being a medieval fantasy game. Wait, so it's live action role playing Gone Wrong. Horribly wrong. And you can binge all episodes now. Oh, man, that sounds so good. I know what I'm doing on my drive home today. Search for Fatal Fantasy and subscribe to the Binge podcast channel on Apple podcasts or at GetTheBinge.com. And then once you're done, you can listen to one of the over 60 true crime and investigative podcasts a part of the channel while you wait for the next month's drop. I really need to know what happens. Selfishly you do so that we can talk about it. So whenever you listen, search for Fatal Fantasy and hit subscribe to the binge to get all episodes all at once. Add free. I want to tell you guys about a podcast that is near and dear to my heart. And I cannot believe it already came out a year ago. And you can all go listen to it. Add free by subscribing to the Binge podcast channel. What podcast can tell us? Oh, it's called Blink Jake Handel's story. I created it about a man named Jake who I met who is the only survivor of a terminal brain illness brought on by heroin use. But there is a lot of mystery and medical malpractice and true crime elements that are very shocking and surprising and even some supernatural elements. So this is definitely an amazing story and it's very unique. Did such an incredible job telling the story and tearing it with a world. So if you have not listened to it yet, my goodness, where have you been? Because Blink is so freaking good. Thank you. Search for Blink wherever you listen and subscribers to the Binge will get the entire season. Add free. Plus you'll get exclusive access to the over 60 other true crime stories on the Binge podcast channel. Hit subscribe on Apple podcasts or head to get the binge.com. At some point during this downward spiral of fraudulent activity, the FBI gets a suspicious activity report about the loan that Toby had taken out on the farm. It seemed that some of the information used to take out the loan might not add up. It was a rare day that I actually went into the office. A colleague, the one who snuck up behind him when he was staring at all the walls lined with highlighted paper. She quickly pokes her head into his office. Tears are streaming down her face. And she said, Toby, there are men with guns and badges across the hall and they're looking for you. And I said, good. Send them over to FBI agents walking to Toby's office. He assumes they're there because of the fake loans and the loan citing and all the other laws his company had been breaking. And he's relieved. He's ready for all of it to be over. But the agents are there to talk about his tax returns. They had huge accordion files full of paper and they sat down and they started with Mr. Groves. We have your loan application from a couple of years ago when you borrowed on your farm. And I said, gentlemen, I thought that might come up. And the other one would say, and we also have your income information. And I hope you're going to tell us that we don't have to sit here in waste time, tell you that they don't match. And I said, no, you don't. You see, the agents were there to talk to Toby about things entirely unrelated to his business. They believed that Toby may have lied on an old tax return and that he definitely lied about his income when he took out the mortgage on his farm. It was no relief because I thought at least I knew what was what and now it's all back on the table again. The agents hand Toby their cards and tell him to call himself a good attorney and have them reach out to him. Then they left. I was puzzled by that. I just, what that was, that was too easy. Toby gets two criminal attorneys and they call the agents. He learns from his attorneys that the FBI wanted something else from him. They wanted him to act as an informant and help them gather evidence against other white collar criminals working in the mortgage industry. During negotiations, Toby confesses everything his company had been up to, but the FBI offers him a deal. He could take a plea agreement for the income and bank fraud if he agreed to help spy for the FBI. As long as he kept his end of the bargain, no one at his company would be prosecuted for the fraud scheme. As they say, folded like a cheap lawn chair and actually ended up being a cooperating witness for other things like secretly recording people because I knew the lingo of the profession. Toby recorded other people who were not associated with his company admitting to their own criminal activity. He couldn't go into details, but somehow people found out what he was doing and of course, they were not happy. I mean, would you be snitches get stitches even in the white collar crime? And one time, Toby found the breaklines in his car were cut and there were times he feared for his life. Toby did this work for the FBI for about a year until his sinencing in 2008. Because of his assistance with the government, he was given a two-year sentence. I was told that that wouldn't have been the case if I hadn't folded and taken responsibility. So that was the only thing to do was to take responsibility for it. Toby's company ended up going out of business, but no one but him goes to prison. He was sent to a low security prison camp in Kentucky. He worked in the kitchen and in the warden's office. His cell block didn't even have bars or doors, just concrete walls separating everyone's sleeping areas. During his time there, Toby says he felt like an observer to his own life. Eventually, he began taking masters classes in psychology and started informally interviewing other incarcerated white collar criminals, trying to understand how they made the choices they'd made to end up there. When I was in prison, interviewed many white collar criminals. I got to sit talk with them at length. Some of them pretty famous. As he kept talking to people, Toby said he realized that white collar criminals had all kinds of motives and backgrounds. Criminals all look very different. Generalizations don't work, but when people get put in certain positions, it changes their decision making in ways that often surprise them. So a lot of people think, "You know, just person's personality, that's who would commit fraud, were very, very bad at predicting behavior, and that it is much more based on situational characteristics than it is personality characteristics." In 2010, Toby Groves was released from prison. Six months later, he was invited to an event for the Federal Reserve in Minnesota. It was terrifying, but he'd felt like there was value in talking about his mistakes, especially the ones that he was most ashamed of. Today, Toby is a public speaker who travels around the country, lecturing on ethics, leadership, and critical thinking to companies. He'd heard so many stories in prison that we could learn from, but people were afraid to be open. So he decided that he would share his story. Do you believe that there are moral absolutes when it comes to cheating or fraud? And if not, do you believe that situations can have people behave unethically when their intentions are good? Well, I think, I mean, it seems like it should be very black and white. People want it to be very black and white. Good as good and bad as bad. But the question assumes that people can tell the difference when they're in that position. And from my research, many times people are blind to it when they're in the situation. And it also assumes that there is one option that's good and one option that's clearly bad. And in the real world, I mean, you can get into situations where you have five options, and they're all bad. And what do you do then? So I think the question deserves a deeper look, maybe a deeper series of questions. Having gone what you've gone through, what would you want to say to a person who was put in a similar situation as you? I would say something to pay attention to is when I was in that position that I started looking for ways to make things work, walls pop up and you try to find your way around it. When you're working that hard at it, you need to step back and consider so when I couldn't get the loan fast enough. So then it's like, oh, well, what do we do? Well, then somebody else is going to get the financing and then we'll take that. I mean, as soon as you're working like that to try to figure out how to make something go your way, you're biased, you're not thinking clearly. And that's when you really should step back and question yourself, you know, what if I did something totally different? And I hope to train people to stop themselves. I considered myself a fraud fighter. I would have bet my life that this, there's no way I would ever spend a day in jail, a prison or anything, or that I would have done any of those things. And actually, I think that is part of the problem. I think many people, they think that they are above and beyond reproach, like they aren't susceptible to making those types of mistakes. I think then you don't see the warning signs. Almost kind of like an immune system. Like if you think you're immune to something, you don't build those antibodies to recognize and fight it. I've talked to so many people that were in situations. They didn't set out. They weren't cold-hearted people. Those are out there. But there's another group and I think it's many more people are like this. They're into something in these tiny steps. And then by the time they actually consciously realize it, it feels like it's too late. Or maybe they can fix it. How did you decide that you'd go public with your story and devote your career to lead conferences for companies on decision-making and identifying fraud? Well, I mean, I never wanted to be a speaker. After this happened, I wanted to crawl under a rock. I just wanted to find some way that I could make it go away and pretend it didn't happen. I had a son that had a progressive mental illness and I did lose him to suicide a few years ago. But he was really the one that got me to talk. He was really wise beyond his years. And when media started calling me, I said no. And my son witnessed this happening. He just made, because it's almost like a passing comment that just man, it dug in. And he said, "Well, I guess you kind of have to pick your prison. How are you going to feel about this 20, 30 years on your deathbed if you try to just pretend it didn't happen versus actually talking about it and maybe even doing some good." And that was it for me. I was like, "Okay, I'll talk." The first talk I did, I got to tell you the first one I thought, I just didn't know if I could do it. I was soaked with sweat, you know, telling this story to people you wish were your peers. And you think it's like, what are they going to do? Are they going to throw knives at me? What's going to happen?" And actually the reaction was so good. People come up to me afterwards and thank me for being transparent and delivering the story without being defensive. And I feel like they learn something from it that does some good. Hey folks, thanks for listening. Just a reminder to follow Cheat wherever you get it. And please do leave a rating and a review if you like what we're doing. It helps other people discover the show. And of course we want more listeners. Also, if you want to listen to the show without the ads, you can subscribe to Cheat Plus. It's like Cheat, but better. It's just $2.99 a month. Or if you're in the UK, $2.49. And you get all of this without having to listen to those annoying commercials. Just go to Apple Podcast and hit subscribe instead of follow. You can try it for free now. Next time on Cheat. I've never seen anyone use fishing in this way before. It doesn't really make sense why would someone do this. And so then I really wanted to start unraveling it and figuring out what was going on. Cheat is presented by me, Alzo Slade. This episode was produced by Casey Georgie. The executive producers are Lizzie Jacobs and Tom Canick. The series editor is Megan Dietri. The original idea for the show was developed by Tom Fuller, assembly and scoring by Camila Cushani and Julia Doyle, engineering and sound designed by Martin Peralta at Output Media. Special thanks to Mike Dietri. Special thanks to the Sony legal team, our production coordinators are Jennifer Mistri and E.K.R. Egg Batola.