Advanced reasoning typically requires Chain-of-Thought prompting, which is accurate but incurs prohibitive latency and substantial test-time inference costs. The standard alternative, fine-tuning smaller models, often sacrifices interpretability while introducing significant resource and operational overhead. To address these limitations, we introduce Prompt-Level Distillation (PLD). We extract explicit reasoning patterns from a Teacher model and organize them into a structured list of expressive instructions for the Student model’s System Prompt. Evaluated using Gemma-3 4B, PLD improved Macro F1 scores on StereoSet (57% to 90.0%) and Contract-NLI (67% to 83%), while increasing LogiQA accuracy to 70%. Similar results on Mistral Small 3.1 demonstrate cross-architecture generalizability, enabling these compact models to match frontier performance with negligible latency overhead. These expressive instructions render the decision-making process transparent, allowing for full human verification of logic, making this approach ideal for regulated industries such as law, finance, and content moderation, as well as high-volume use cases and edge devices.

We present LegalSim, a modular multi-agent simulation of adversarial legal proceedings that explores how AI systems can exploit procedural weaknesses in codified rules. Plaintiff and defendant agents choose from a constrained action space (for example, discovery requests, motions, meet-and-confer, sanctions) governed by a JSON rules engine, while a stochastic judge model with calibrated grant rates, cost allocations, and sanction tendencies resolves outcomes. We compare four policies: PPO, a contextual bandit with an LLM, a direct LLM policy, and a hand-crafted heuristic; Instead of optimizing binary case outcomes, agents are trained and evaluated using effective win rate and a composite exploit score that combines opponent-cost inflation, calendar pressure, settlement pressure at low merit, and a rule-compliance margin. Across configurable regimes (e.g., bankruptcy stays, inter partes review, tax procedures) and heterogeneous judges, we observe emergent “exploit chains”, such as cost-inflating discovery sequences and calendar-pressure tactics that remain procedurally valid yet systemically harmful. Evaluation via cross-play and Bradley-Terry ratings shows, PPO wins more often, the bandit is the most consistently competitive across opponents, the LLM trails them, and the heuristic is weakest. The results are stable in judge settings, and the simulation reveals emergent exploit chains, motivating red-teaming of legal rule systems in addition to model-level testing.