It was a most unusual question raised in the middle of an ordinary conversation last August between Monroe Sonnenborn, litigation chief at Morgan Stanley Dean Witter & Co. and his main outside counsel, James Benkard of Davis Polk & Wardwell. Sonnenborn wanted to know whether Morgan Stanley could legally pay a $10,000 gratuity to an informant who had tipped off the firm to a plot to tamper with the its e-mail–and was now in the middle of a sting set up by the New York City police.

Benkard said yes, and Sonnenborn made the payment. Ten months later a scandal erupted, embarrassing Morgan Stanley, shattering at least two careers, and jolting the relationship between the investment bank and its longstanding outside counsel, Davis Polk.

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