Deal Book Thinks Lawyers’ “Cardinal Rule” is to Advise CEOs how to Defraud with Impunity

By William K. Black
(Cross posted at

Overview and Background

The New York Times’ “Deal Book” continues its ethics-free treatment of the ethical collapse of the leaders of many of our most elite firms related to finance. Matthew Goldstein’s*  March 6, 2014 article is entitled “4 Accused in Law Firm Fraud Ignored a Maxim: Don’t Email.”

The article is about the indictment charging the leaders of one of finance’s leading law firms – Dewey & LeBoeuf – with securities fraud and larceny.

“The indictment paints a portrait of a law firm being run like a criminal enterprise. Mr. Vance said his office had already secured guilty pleas from seven other people who once worked for Dewey.”

Deal Book refuses to recognize control fraud even when the indictment describes a control fraud.  The indictment does not “paint a portrait of a law firm being run like a criminal enterprise.”  The indictment describes a criminal enterprise led by the partners controlling Dewey & LeBouef.  Deal Book still can’t bend its mind around the fact that seemingly legitimate firms make the best “weapons” for fraud.

Deal Book’s incredible statement about lawyers’ corrupt “cardinal rule”

The Deal Book article, as is the norm, discusses an issue of tremendous ethical importance – which Deal Book studiously ignores.  The word “ethics” appears only once in the article and it does so solely because the word is part of a job description of one of people being quoted.

The key sentence is the first sentence of the Deal Book article.  I provide the following paragraphs to provide necessary context.

“Several former leaders of the once-high-flying law firm Dewey & LeBoeuf apparently violated a cardinal rule that lawyers always tell their clients: Don’t put anything incriminating into an email.

Four men, who were charged by New York prosecutors on Thursday with orchestrating a nearly four-year scheme to manipulate the firm’s books to keep it afloat during the financial crisis, talked openly in emails about “fake income,” “accounting tricks” and their ability to fool the firm’s “clueless auditor,” the prosecutors said.

The messages were included in a 106-count indictment against Steven Davis, Dewey’s former chairman; Stephen DiCarmine, the firm’s former executive director; Joel Sanders, the former chief financial officer; and Zachary Warren, a former client relations manager. They were charged with larceny and securities fraud. One of the men even used the phrase “cooking the books” to describe what they were doing to mislead the firm’s lenders and creditors in setting the stage for a $150 million debt offering that was supposed to solve the firm’s financial woes, according to the messages.”

The lead sets the bemused tone of the article.  The article’s hook is the ironic failure of top lawyers to follow their own advice that they purportedly “always tell their clients” on how to commit fraud with impunity by ensuring that there is no paper (or electronic) trail of “incriminating” evidence of their crime.  The “crim” root of the word “incriminating” comes from the Latin word for “crime.”  The word “incriminating” means that it provides evidence that one has committed a crime.

Deal Book: lawyers’ “cardinal rule” is to help “clients” commit crimes with impunity

What the Deal Book describes as corporate lawyers’ “cardinal rule” is clearly unethical and often a crime.  A corporate lawyer who counsels a “client” on how to commit a crime without being prosecuted by using fraud mechanisms that prevent the FBI from finding the “incriminating” evidence establishing the crime has made himself a co-conspirator who is aiding and abetting the fraud.  The lawyer has also breached his legal ethical duties and his duties to the client.  This is an area with which I have particular experience.  I was an attorney at a large law firm and the general counsel of a very large bank.  In my regulatory capacity I brought cases and made criminal referrals against several prominent law firms and their partners.

If Deal Book were correct in its purported statement of our “cardinal rule” as corporate counsel, then Deal Book had the financial news scoop of the decade.  It should have written a series of articles as soon as it discovered the purported “cardinal rule.”  Consider the importance and nature of the role that inside and outside legal counsel for corporations play in American finance and business.  Our legal opinions are essential for a huge array of deals to be done.  Our counseling and deal structuring activities are huge.  We provide guidance on what the law is and requires.  We are expected to be a voice for respecting the rule of law.  And we often play a key role in corporate ethics programs.

We could infer six critical facts about law and corporations if Deal Book were correct about the legal profession’s “cardinal rule” in advising corporations.  That rule would mean that:

  • The portion of the legal profession advising corporations is profoundly corrupt.  The legal profession routinely advises corporate officials on how to commit fraud with impunity by hiding the “incriminating” evidence from the FBI.
  • A “Gresham’s” dynamic (bad ethics drives good ethics out of the professions and markets) has become so dominant in this branch of law that aiding and abetting fraud has become the norm.  The Deal Book article shows how Dewey’s leaders helped create a Gresham’s dynamic to ensure that its Ernst & Young audit partner would give a clean opinion to Dewey’s financial statements even though Dewey was insolvent and the financial statements were pervasively fraudulent.  Deal Book, of course, fails to consider any of the implications of such dynamics for governance, ethics, prudence, criminality, or the financial crisis.
  • Unethical and illegal corporate lawyers would only prevail if the corporate leaders (CEOs and CFOs) overwhelmingly wanted unethical lawyers who would help them lead control frauds with impunity by giving them practical advice on how to prevent the FBI from finding the “incriminating” evidence that would support a successful prosecution.
  • An unethical corporate lawyer should be at a huge competitive disadvantage in seeking business from honest corporate officers.  Honest corporate officers know that the dishonest senior corporate officers and directors pose a vastly greater risk of fraud and incompetence than any external fraud risk.  If honest corporate controlling officers were the norm they would quickly eliminate dishonest legal counsel.
  • A powerful Gresham’s dynamic must exist among controlling corporate officers for there to be a widespread desire to hire unethical corporate lawyers that preach a “cardinal rule” that, effectively, encourages the officers to commit crimes – particularly crimes that harm the corporation.
  • The failure of DOJ to prosecute the elite financial officers who led the epidemics of accounting control fraud that drove our financial crisis would be more understandable if counsel were frequently willing to counsel those officers on how to commit fraud without leaving a paper (or electronic) trail of “incriminating” evidence for the FBI.

Deal Book forgets who the corporate lawyers’ “client” is

Discussing this subject requires a clarification and correction about Gelles’ use of the word “client.”  Gelles is talking almost entirely about lawyers’ advice to corporations.  The client is the corporation.  The officer owes fiduciary duties to the client to act in its best interests even if doing so will harm the lawyer.

Corporations, however, are legal fictions.  The controlling officers of the firm can hire and fire the lawyers whether they are inside or outside counsel.  The controlling officers get to use the firm’s assets to pay the lawyers.  Some lawyers’ loyalty, therefore, will be to whoever controls the purse strings (the corporation’s CEO and CFO) rather than to the corporation.  The art is for the CEO and CFOs running control frauds to use their leverage to suborn “independent outside professionals” to aid the fraud.  As George Akerlof and Paul Romer’s title of their 1993 article indicates, the CEO leading a control fraud is the most dangerous enemy of the client “Looting: The Economic Underworld of Bankruptcy for Profit.”

With those facts in mind, return to the key claim that Deal Book makes about the “cardinal rule” that lawyers that practice corporate law “always tell their clients.”  The reality is that lawyers “[never] “tell their [corporate] clients” this “cardinal rule” about how to make it difficult for the FBI to find the “incriminating” evidence of the corporation’s vicarious liability for the crimes of its officers.  The corporation has no ears to hear and no eyes to read the lawyer’s unethical and (often) criminal advice contained in the Deal Book’s (purported) “cardinal rule.”

If Deal Book were correct about lawyers’ “cardinal rule,” the lawyer would not only be a potential criminal co-conspirator with the corporation’s controlling officers – he would be aiding and abetting the controlling officers’ looting of the client.  Even if he was advising more junior officers on how to commit their frauds without leaving “incriminating” evidence those frauds would often be committed against the client.  The goal of avoiding leaving “incriminating” evidence is not simply to avoid prosecution – it is also to avoid detection by honest corporate officers such as the internal auditor.  It is not lawful or ethical for a lawyer to advise an officer on how he can commit a crime with impunity that makes the corporation more profitable, but it is even more obscene for a lawyer to advise an officer on how he can loot the client without leaving a trail of “incriminating” evidence.

What happened to ethics in Deal Book’s article about legal ethics?

Deal Book seems to have understood that a story arising from disgraceful legal ethics involves ethics.  Gelles interviewed a legal ethics scholar.  That mention of the scholar is the only use of the word “ethics” in the article.  Naturally, the ethics scholar was not quoted discussing ethics and the article ignores the ethical implications of lawyers’ “cardinal rule.”

The paradox of legal ethics

Deal Book is wrong about the “cardinal rule.”  Lawyers in corporate practice do not “always” advise corporate officers about how to commit crimes without leaving “incriminating” evidence.  They rarely give such advice.  The paradox is that while corporate lawyers rarely give such advice; the senior lawyers selected by the elite officers who lead control frauds routinely aid and abet those frauds.  The same was true during the crisis of appraisers, top tier audit partners, and senior credit rating agency officials.  These suborned professionals represent a small percentage of their overall profession, but they are sufficiently common to support epidemics of accounting control fraud.  The Gresham’s dynamic is not as powerful as Deal Book (implicitly) makes it out to be when it uses the terms “always” and “cardinal rule” to imply that lawyers who represent corporations all advise corporate officers on how to avoid leaving a trail of “incriminating” evidence.  The six implications I discussed above should be one of Deal Book’s dominant themes.  The professionals selected by the officers running control frauds do have a “cardinal rule” and that rule is to prosper by helping those officers become wealthy through fraud with impunity.

Deal Book’s “cardinal rule” is to treat elite financial frauds as ironic jokes

We are left with the question I keep asking: what would it take for Deal Book to take seriously ethics and control fraud in the financial sphere?  How many scandals and crises must we suffer while what should be the national paper of record’s top financial reporting group embraces sycophancy for CEOs as its highest calling?

Deal Book is the best available setting for doing real reporting and analysis, which would make it a priceless global asset.  Instead, it is an embarrassment with a cardinal rule: “Don’t put anything incriminating into [a Deal Book column unless you treat it as a joke or a purported example of vile ‘bloodlust.’]”  I last asked a variant of my “what would it take” question to Deal Book when Sorkin wrote a column claiming that anyone that felt Jamie Dimon should be fired to be held accountable for JPMorgan’s epic crime spree was engaging in “bloodlust.”

Anyone with a passion for integrity is treated by Deal Book like a freak or villain.  CEOs that set a corrupt “tone at the top” that create the most destructive financial frauds that drove the financial crisis are treated by Deal Book as geniuses and paragons.  It is madness and its consequences for anyone who cares about people, principles, and institutions are frightening.  To write for Deal Book one must be profoundly unserious – and proud of that ironic detachment from the resultant human misery.  Do Deal Book reporters go to Italy, Spain, and Greece?  What do they see when they visit those nations that continue to suffer unemployment rates greater than the Great Depression?  What do they see when they travel around the U.S. and see our record levels of children being raised in families with such low incomes that they qualify (before the cuts) for food stamps?


One of the Nation’s most prestigious law firms has failed and the Department of Justice alleges, on the basis of strong proof, that it was an accounting control fraud for the last four years of its operations.  Deal Book thinks (a) that lawyers follow a “cardinal rule” that leads them to routinely advise corporate officers how to loot the client while hiding the “incriminating” evidence of their criminal fraud, (b) that the implications of this purported fact are not worthy of discussion, and (c) what is worth chuckling about is the irony that Dewey’s leaders failed to follow their own advice and instead left a trail of “incriminating” evidence of the accounting control fraud that they led.  Oh, and the same elite law firm leaders of Dewey alleged to have run this control fraud were the top advisors to many of the world’s most elite financial institutions.  They also successfully suborned one of the top audit firms in the world to give clean opinions to their pervasively fraudulent financial statements while they were deeply insolvent.  That is the same pattern of criminal conduct that the leaders of many of our elite financial institutions followed that drove our financial crisis.  The implications of these facts are profoundly troubling.  But none of this can drive Deal Book to serious analysis or even reflection.  Irony conquers all on Deal Book’s pages.


Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @williamkblack


*Correction: the original version of this column incorrectly identified the primary author of the Deal Book column as Mr. David Gelles.  Mr. Black regrets his error.

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