Egelhof v. Szulik

Egelhof v. Szulik, 2008 NCBC 2

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

COUNTY OF WAKE FILE NO. 04 CVS 11746

ANDREW EGELHOF, Derivatively on Behalf of

Red Hat, Inc.

Plaintiff,

vs. ORDER ON MOTION FOR

ATTORNEY FEES

MATTHEW J. SZULIK, KEVIN B. THOMPSON,

PAUL J. CORMIER, TIMOTHY J. BUCKLEY,

MARK H. WEBBINK, ALEX PINCHEV,

ROBERT F. YOUNG, EUGENE J. McDONALD,

F. SELBY WELLMAN, MARYE A. FOX,

WILLIAM S. KAISER, DR. STEVE ALBRECHT

and H. HUGH SHELTON

Defendants.

ORDER AND OPINION

{1} This matter is before the Court on Defendants’ Motion for Attorneys’

Fees filed after the Court granted Defendants’ Motion to Dismiss. The Court

has concluded that it will not award attorney fees on the basis asserted by

Defendants. However, the Motion has brought to the Court’s attention

certain actions on the part of Mr. Egelhof, the shareholder representative,

and his out-of-state counsel which are of sufficient concern to the Court that

the Court will enter non-monetary sanctions.

Robbins Umeda & Fink, LLP by Brian J. Robbins, Jeffrey P.

Fink, and Steven R. Wedeking; Garlitz & Williamson, PLLC by

F. Lane Williamson for Plaintiff Andrew Egelhof.

Womble Carlyle Sandridge & Rice, PLLC by Pressly M. Millen

and Christopher W. Jones; Wilmer Cutler Pickering Hale and

Dorr, LLP by Jeffrey B. Rudman, William H. Paine, and

Christopher Davies for Defendants Matthew J. Szulik, Kevin B.

Thompson, Paul J. Cormier, Timothy J. Buckley, Mark H.

Webbink, Alex Pinchev, Robert F. Young, Eugene J. McDonald,

F. Selby Wellman, Marye A. Fox, William S. Kaiser, Dr. W.

Steve Albrecht, and H. Hugh Shelton.

Tennille, Judge.

{2} This is a purported shareholder derivative action in which the

failure of counsel to communicate with their client in violation of the Rules of

Professional Conduct, the failure of the client to communicate with counsel in

contravention of his fiduciary duties, the needless rush to file a complaint,

the filing of defective pleadings, and the solicitation of a plaintiff unqualified

to fulfill the significant duties of a plaintiff in a shareholder derivative action

all converged to create a situation in which neither the firm nor the client

fulfilled their duties and obligations. Confirming their slapdash approach to

representation, Plaintiff’s out of state counsel appeared and argued the

motion for sanctions without being admitted pro hac vice (conduct

constituting the unauthorized practice of law in this state).

{3} The above listing of Plaintiff’s counsel is problematic. Mr.

Williamson signed the original and amended complaints as local counsel, but

did not draft the pleadings. Mr. Robbins and Mr. Fink were listed as “of

counsel” along with their firm. 1 Mr. Wedeking is the only lawyer in the firm

to file a pro hac vice motion and be admitted to practice in North Carolina in

this case. He appeared at the hearing on the motion to dismiss. Mr. Fink

appeared on behalf of Mr. Egelhof and actually argued the pending motion

for sanctions. Mr. Robbins and Mr. Fink personally represented Mr. Egelhof

in his deposition ordered by the Court which took place in Wichita, Kansas,

where Mr. Egelhof then resided. Mr. Fink and Mr. Robbins never filed pro

hac vice motions and were therefore never admitted to practice in North

Carolina in this action. Defendants have not moved for sanctions against Mr.

1 References to the “firm” herein will refer to Robbins Umeda & Fink, LLP.

Williamson, and the conduct which concerns the Court is not attributable to

him. 2 By appearing and arguing the sanctions motion, Mr. Fink has waived

any defense that the Court does not have jurisdiction to sanction him.3

Through the appearances of Mr. Wedeking and Mr. Fink, the firm has come

under the jurisdiction of the Court. The Court can find no guidance on the

issue of whether Mr. Robbins has appeared in this action by representing his

client in an out-of-state deposition of Plaintiff in a North Carolina action. The

Court concludes as a matter of law that he has made a sufficient appearance

by signing as “of counsel” and defending Mr. Egelhof’s deposition. Mr.

Wedeking and Mr. Fink both described Mr. Egelhof as Mr. Robbins’s client.

Messrs. Wedeking, Robbins, and Fink are all licensed to practice in

California. 4

2 The fact that sanctions have not been sought against Mr. Williamson, a member of the

North Carolina State Bar Disciplinary Hearing Commission, does not mean that other North

Carolina lawyers cannot learn from the position Mr. Williamson occupied in this matter.

Had Defendants’ counsel elected to do so, they could have pursued their remedies against

local counsel, particularly in light of the failure to see that Mr. Fink was admitted pro hac

vice. Only local counsel signed the pleadings which are asserted to be in violation of Rule 11.

The Court does not believe that it is the primary duty of local counsel to know and

communicate with a client who has an established relationship with out-of-state counsel to

the same extent as the primary counsel. The local lawyer’s role is more limited, and local

counsel should be able to rely on primary out-of-state counsel to communicate with the client.

Where local counsel signs pleadings and briefs, they are representing to the Court that the

positions taken therein have merit and that Rule 11 has been followed. Local counsel would

be well advised to consider as a practical matter some of the things a court might consider in

reviewing the pleadings. Is there a real plaintiff capable of fulfilling his or her fiduciary

duties? Is the complaint being filed in a race to the courthouse? Are the allegations based on

known facts or media stories? Has there been any effort to review the books and records of

the company to support demand futility claims? Are the claims meritorious, and are there

allegations that would support a finding that red flags existed to warrant board action in a

derivative case? Is there clear precedent supporting or contrary to the positions taken?

3 It is difficult for the Court to fault Mr. Williamson for permitting Mr. Fink to argue without

being admitted pro hac vice when the Court failed to make any inquiry of his status when he

rose to argue the motion for sanctions. Nor did defense counsel raise any such issue.

4 Information about the firm and its lawyers can be found at ruflaw.com. A fourth lawyer,

Mr. Louis A. Kerkhoff, apparently drafted the original complaint. (Pl.’s Mem. Law Opp’n

Defs.’ Mot. Att’ys’ Fees, Decl. Louis A. Kerkhoff Supp. Pl.’s Opp’n Defs.’Mot. Att’ys’ Fees ¶ 2.)

In doing so it does not appear that he had any contact with Mr. Egelhof. (Pl.’s Mem. Law

Opp’n Defs.’ Mot. Att’ys’ Fees, Decl. Louis A. Kerkhoff Supp. Pl.’s Opp’n Mot. Att’ys’ Fees ¶¶

2–3 (In listing the various tasks of organizing and analyzing information prior to drafting the

complaint, Mr. Kerkhoff does not mention meeting or interviewing Mr. Egelhof.).) Mr.

Kerkhoff was a third-year associate when he drafted the complaint, and Mr. Wedeking was a

second-year associate when he came to argue the motion to dismiss. Mr. Kerkhoff’s efforts in

{4} The Robbins Umeda & Fink law firm has appeared in another

recent case before the Court captioned In Re Pozen Shareholders Litigation,

Orange County, 04 CVS 1540 (hereinafter the “Pozen case”). Mr. Williamson

was local counsel for the plaintiff in that case as well. Mr. Wedeking

appeared pro hac vice and argued the motion to dismiss. Mr. Robbins and

Mr. Fink appeared as “of counsel.” The Pozen case was also a shareholder

derivative action. Mr. Millen, counsel for Defendants in this case, also

represented a different set of defendants in the Pozen case. The Pozen case

was dismissed for failure to adequately plead demand futility under

Delaware law by Order dated November 10, 2005. See In Re Pozen S’holders

Litig., 2005 NCBC 7 (N.C. Super. Ct. Nov. 10, 2005)

http://www.ncbusinesscourt.net/opinions/2005%20NCBC%207.htm. That

order and its date have relevance to the issues in this case.

{5} The original Complaint was a derivative action against Red Hat,

Inc. (“Red Hat”) and several of its officers and directors (“Defendants”).

(Compl. ¶ 1.) The Complaint alleged that several of the named officers and

directors engaged in insider trading, thereby breaching their fiduciary duty

to Red Hat (Compl. ¶¶ 61–65) and that all Defendants breached their

fiduciary duty to Red Hat (Compl. ¶¶ 66–71). The Complaint alleged that the

officer and director Defendants abused their control of Red Hat (Compl. ¶¶

72–76), engaged in the “gross mismanagement” of Red Hat (Compl. ¶¶ 77–

81), caused the waste of Red Hat’s corporate assets (Compl. ¶¶ 82–85), and

were unjustly enriched by those actions (Compl. ¶¶ 86–87). In support of

these allegations, the Complaint cited heavily from press releases issued by

Red Hat. (Compl. ¶¶ 34–47.) The Amended Complaint pled with more

particularity the actions of the officers and directors. (Am. Compl.) The

Amended Complaint did not include any additional causes of action. (Am.

Compl. ¶¶ 124–51.) Defendants filed a motion to dismiss the Amended

drafting the complaint are detailed in his affidavit filed in support of Plaintiff’s opposition to

the motion for sanctions. He has not been admitted pro hac vice.

Complaint on September 29, 2005. The motion was granted and the claims

dismissed with prejudice by Order of Judge Tennille on March 13, 2006.

(Order ¶ 68.) The Order dismissed the claims based on Mr. Egelhof’s loss of

standing as a shareholder and the Amended Complaint’s failure to establish

demand futility under Delaware law. (Order ¶ 2.)

{6} According to statements made by Mr. Wedeking and Mr. Fink in

oral argument, the firm has a “shareholder relations department” which is

evidently charged with communicating with clients who are serving as

shareholder derivative or class action plaintiffs in lawsuits being handled by

the firm. It is unclear if the shareholders relations department is populated

by lawyers, legal assistants, or public relations personnel. It was clear from

statements made by both Mr. Wedeking and Mr. Fink at oral argument that

neither of them had ever met Mr. Egelhof nor knew anything about him. Mr.

Wedeking did not know how many shares Mr. Egelfhof owned, and Mr. Fink

erroneously represented to the Court that he owned hundreds of shares.

{7} When Mr. Wedeking appeared in this Court and knew absolutely

nothing about his client, the Court requested that he at least find out how

many shares of Red Hat stock his client owned. That request obviously

prompted some inquiry which produced the information that Mr. Egelhof

was no longer a shareholder, a fact communicated to the Court and counsel

by e-mail. When Mr. Fink appeared and argued the motion for sanctions, he

did not know much more than Mr. Wedeking about the client. His excuse

was that Mr. Egelhof was originally Mr. Robbins’s client. The Court ordered

that Mr. Egelhof’s deposition be taken. That deposition produced the facts

which are of concern to the Court. Mr. Robbins and Mr. Fink both defended

Mr. Egelhof’s deposition.

{8} Defendants’ Motion for Attorneys’ Fees has two possible grounds.

First, Defendants contend that both the original Complaint and the Amended

Complaint defectively alleged demand futility and that the defect was known

to Plaintiff before filing the Complaint or at the very least became

abundantly clear with this Court’s ruling in Pozen. For reasons set forth

below, the Court declines to enter sanctions on the ground of defective

pleading of demand futility alone. Second, Defendants contend that Plaintiff

lost all standing to pursue this shareholder derivative action when he sold his

stock on December 31, 2005, and that continuation of this lawsuit after that

date warrants the imposition of sanctions including attorney fees. 5

Defendants are correct that some form of sanction is appropriate for the

conduct of Plaintiff and his out-of-state counsel in connection with Mr.

Egelhof’s failure to fulfill his fiduciary duties and his obligations to the Court.

However, the Court declines to award attorney fees as a part of the sanctions

because of the timing involved.

{9} With respect to the first basis for sanctions, the Court would decline

to sanction Plaintiff and his counsel if defective pleading were the only

ground for concern in this action. Demand futility under Delaware law has

generated significant litigation and decisional law. R. Franklin Balotti &

Jesse A. Finkelstein, The Delaware Law of Corporations & Business

Organizations § 327.3 (6th ed. 2006). It is an area fraught with difficulty and

not susceptible to bright-line tests. 6 This Court’s opinion in Pozen

dismissing the complaint for failure to adequately plead demand futility

under Delaware law did not plow new ground. Pozen, 2005 NCBC 7 ¶ 2. The

Court applied established Delaware principles. Id. at ¶¶ 41–51. It is true

that certain of the allegations in support of demand futility asserted on

5 Defendants and Plaintiff both state that Mr. Egelhof sold his Red Hat shares on December

31, 2005. (Defs.’ Mem Law Supp. Mot. Att’ys’ Fees 3; Pl.’s Mem. Law Opp’n Defs.’ Mot.

Att’ys’ Fees 3.) The Trade Confirmation from E*Trade Securities dated December 30, 2005,

shows that Mr. Egelhof sold his shares on December 30, 2005. (Egelhof Dep. Ex. 4, July 13,

2006.) The Court will refer to December 31, 2005, as the date of sale throughout the opinion.

6 Unlike Delaware, North Carolina has elected to remove this additional layer of dispute

from shareholder litigation by eliminating demand futility and requiring every shareholder

to make demand upon the Board of Directors before filing a derivative action. See N.C. Gen.

Stat. § 55-7-42 (statute no longer contains a demand futility exemption); see also Greene v.

Shoemaker, 1998 NCBC 4 ¶ 22 (N.C. Super. Ct. Sept. 24, 1998),

http://www.ncbusinesscourt.net/opinions/1998%20NCBC%204.htm (“It is absolutely clear

that the legislature intended to adopt the universal demand requirement and eliminated the

futility exception . . . .”).

behalf of both the Pozen plaintiff and Mr. Egelhof by the Robbins Umeda &

Fink firm had been soundly rejected by the Delaware courts. Id. at ¶¶ 41–81.

It is further true that many of the allegations in this Complaint were not

grounded in fact but based on media reports or published analyst opinions

(Compl. ¶¶ 36–60) and that the Delaware courts have frowned upon such

pleadings. See Beam v. Stewart, 833 A.2d 961, 981–82 (Del. Ch. 2003)

(noting with dissatisfaction the litigants’ reliance on media reports and

morning newspapers and failure to investigate records such as board

minutes). It is also true that this derivative action was filed in a needless

rush to court, having been filed only thirty-one days after the restatement of

income by Red Hat 7 and after a class action had already been filed on behalf

of the shareholders. (Defs.’ Mem. Law Supp. Mot. Att’ys’ Fees 2 n.1.) The

Complaint in this action was also filed without any inspection of the books

and records of the company that Delaware courts have repeatedly

admonished counsel to pursue. See Beam, 833 A.2d at 981–82. These

shortcomings in the Complaint do raise red flags for the Court in connection

with the conduct of this litigation by Plaintiff’s counsel. They demonstrate a

disregard for or lack of attention to the rules of procedure as well as court

decisions and admonitions. However, the Court does not believe that the

initial pleadings in this case would, standing alone, support Rule 11

sanctions. The test for demand futility under Delaware law is always fact

specific and contextual. See Pozen, 2005 NCBC 7 ¶¶ 47–49 (discussing the

application of Delaware law to demand futility). The application of the law is

done on a case-by-case basis. It is, therefore, an area in which Rule 11

sanctions should be invoked sparingly and with caution.

{10} Timing is also a factor here. The Complaint was filed August 18,

2004. The Amended Complaint was filed July 21, 2005. Defendants’ Motion

7 Red Hat restated earnings on July 19, 2004.

Carolyn Pritchard, Red Hat restates first-

quarter earnings, CBS Marketwatch.com, July 19, 2004. This complaint was filed August

18, 2004.

to Dismiss was filed September 19, 2005. Plaintiff’s response to the motion to

dismiss was filed October 31, 2005. The Order dismissing the Pozen case was

entered November 10, 2005. Defendants’ reply to Plaintiff’s response to the

motion to dismiss was filed November 15, 2005. Mr. Egelhof sold his shares

in Red Hat on December 31, 2005. (Defs.’ Mem. Law Supp. Mot. Att’ys’ Fees

3; Pl.’s Mem. Law Opp’n Defs.’ Mot. Att’ys’ Fees 3.) Oral arguments on the

motion to dismiss were originally scheduled for December 20, 2005, but were

heard February 2, 2006, upon Plaintiff’s motion. The Order dismissing

Egelhof was entered March 13, 2006.

{11} The Court’s decision and order in Pozen was not entered until after

the original Egelhof Complaint and Amended Complaint were filed; therefore

Plaintiff’s counsel did not have the benefit of that decision when drafting the

pleadings. See supra ¶ 9. What is significant for later analysis is that Mr.

Egelhof was not informed of the decision which could have had a direct

impact on his case. (Egelhof Dep. 84–85, July 13, 2006.) That disregard is

especially important in light of the request by defense counsel that Plaintiff

reconsider going forward with the litigation following the Pozen decision — a

request that was not conveyed to Plaintiff. (Egelhof Dep. 85–86, July 13,

2006.) It is also important in light of Mr. Wedeking’s admission at oral

argument that there were no red flags to put the directors of Red Hat on

notice that they had any obligation to take any action with respect to the

advice provided by the company’s outside accountants. (Defs.’ Mem. Law

Supp. Mot. Att’ys’ Fees 3.) The Court’s decision in Pozen focusing on the

absence of red flags as required by Delaware law and the admitted absence of

such red flags in the case at bar were both clearly important information a

fiduciary would need to know, especially in light of a formal request by

Defendants to reconsider pursuing the lawsuit or face sanctions if it were

dismissed. Mr. Egelhof did not have that information, nor did the firm have

the information that Mr. Egelhof had sold his shares. However, the firm

should have possessed that information and in all probability would have but

for its failure to inform Mr. Egelhof of the developments in his case. The

timing has influenced the Court’s decision not to assess fees as a part of the

sanctions. The motion to dismiss was fully briefed when the Pozen decision

came out. The time and effort that remained was the lawyers’ and the

Court’s time in preparing for and attending oral argument when the plaintiff

had lost standing.

{12} It is significant that Mr. Egelhof possessed neither a significant

ownership interest in Red Hat nor any experience to prepare him to act as a

fiduciary seeking recovery of hundreds of millions of dollars on behalf of the

company. In 2004, Mr. Egelhof purchased twenty-eight shares of Red Hat

common stock for which he paid $710.50. (Egelhof Dep. Exs. 2, 3, July 13,

2006.) He sold those shares on December 31, 2005, for $756.98, earning a

profit of $46.48. (Egelhof Dep. Ex. 4, July 13, 2006.) His Red Hat holdings

constituted about 30% of his entire portfolio of $2,000 invested in his E-trade

account. (Egelhof Dep. 91, July 13, 2006.) Mr. Egelhof’s obvious concern was

making a profit on his stock because he sold it as soon as he had a profit in

it. 8 In short, Mr. Egelhof did not have a significant financial interest in the

outcome of this litigation. While the size of ownership is not determinative of

standing, a potential plaintiff’s lack of a real financial stake in the litigation

is a warning sign that he or she may not be willing or able to devote the time

necessary to fulfill the fiduciary obligations imposed by law on a shareholder

derivative plaintiff. 9 Even before the Complaint was filed, the firm had a

larger financial stake in the litigation than Mr. Egelhof.

8 Mr. Egelhof testified that he was in debt, needed the money, and just forgot about the

lawsuit when he sold his stock. (Egelhof Dep. 41–42, July 13, 2006.) He believes he signed

some letter saying he would hold on to his stock, but did not have a copy of it. (Egelhof Dep.

43–44, July 13, 2006.)

9 As Mr. Fink admitted in oral argument, those duties included supervising counsel. The

Private Securities Litigation Reform Act (“PSLRA”) created heightened pleading

requirements and more duties for the plaintiffs and their counsel in class action law suits.

15 USCS § 78u-4 (LEXIS through Jan. 7, 2008 legislation). See Kafenbaum v. GTECH

Holdings Corp., 217 F. Supp. 2d 238, 244–45 (R.I. 2002) (stating “a securities fraud complaint

must also satisfy the heightened pleading requirements contained in . . . the PSLRA”). One

of the purposes of the PSLRA is to ensure that class members’ interests are protected. In re

{13} Nor did Mr. Egelhof have the knowledge, background or experience

to fulfill his fiduciary duties. Although his testimony is somewhat ambiguous

on the point, it appears fairly clear that this Kansas resident responded to an

Internet solicitation from a California law firm looking for a plaintiff in a

North Carolina action. (Egelhof Dep. 46–50, July 13, 2006.) At the time, he

was twenty-four years old, had worked in various information technology

roles at Kansas State University, and had a degree in business

administration. (Egelhof Dep. 15–18, July 13, 2006.) He had little investing

experience, no experience in litigation 10 , no prior connection with the San

Diego law firm, no personal knowledge of Red Hat and its operations, and a

minor criminal record. (Egelhof Dep. 30–36, 20–22, 39–40, July 13, 2006.) In

short, he lacked any credentials to act as a fiduciary for a company in multi-

million dollar litigation. The firm should have been aware of his holdings

and inexperience.

{14} Given his inexperience and miniscule financial interest in the

litigation, it should come as no surprise that Mr. Egelhof played no

significant role in the litigation process. He had never met Mr. Robbins or

Mr. Fink until the night before his deposition related to the sanctions

motion. 11 He had received and reviewed the original Complaint and the

Amended Complaint. (Egelhof Dep. 53–56, July 13, 2006.) In total he had

Rent-Way Secs. Litig., 305 F. Supp. 2d 491, 518 (W.D. Pa. 2003) (citation omitted). The

PSLRA instructed that the “most adequate plaintiff” is the one that has “(1) ‘the largest

financial interest’ in the relief sought by the class and (2) satisfies the requirements set forth

in Rule 23 of the Federal Rules of Civil Procedure.” Bassin v. Decode Genetics, Inc., 230

F.R.D. 313, 316 (S.D.N.Y. 2005) (citations omitted). Mr. Egelhof’s diminutive stake in the

litigation would most likely not qualify as making him the “most adequate plaintiff.”

However, the presumption of the most adequate plaintiff being the plaintiff with the largest

financial stake does not apply in derivative actions. In re Comverse Tech., Inc. Derivative

Litig. 06-CV-1849, 2006 U.S. Dist. LEXIS 88261, at *10–11 (E.D.N.Y. 2006).

10 He had received class action notices in the past but been too lazy to fill them out and send

them in. (Egelhof Dep. 20–21, July 13, 2006.)

11 Mr. Egelhof had a remote idea who Mr. Williamson was but had never met him (Egelhof

Dep. 62–63, July 13, 2006) and it appears had never met or talked to any other lawyers in

the Robbins Umeda & Fink law firm besides speaking to Mr. Robbins on the phone. (Egelhof

Dep. 50–52, 55 July 13, 2006.) He made no reference to any communication with the

shareholder relations department. (Egelhof Dep. 50–52, July 13, 2006.)

devoted no more then five (5) hours to the litigation process. (Egelhof Dep.

58, July 13, 2006.) There is no indication in the record that he ever received

copies of the correspondence from Defendants’ counsel requesting

reconsideration of his pursuit of the lawsuit, nor was he informed of the

Court’s decision in Pozen or the fact that a prior action in Delaware had been

voluntarily dismissed. 12 He was not informed of the hearing on the motion to

dismiss or the hearing on the motion for sanctions against him. (Egelhof

Dep. 86–88, July 13, 2006.) He was not sent the order dismissing his case.

(Egelhof Dep. 83, July 13, 2006.) Mr. Egelhof moved several times and failed

to inform the law firm of his new address. (Egelhof Dep. 79, July 13, 2006.)

There were significant periods of time when the firm did not know where to

find him. (Egelhof Dep. 79–80, July 13, 2006.) It appears that neither the

firm nor the client communicated with each other in any professional

manner. The firm never informed the Court that the shareholder derivative

plaintiff was missing. Mr. Egelhof did not even know how the firm had found

out he sold his stock. (Egelhof Dep. 45, July 13, 2006.) Had the Court not

sought the information, it appears likely that Mr. Egelhof’s lack of standing

might not ever have been discovered. Clearly, no one at the firm was

concerned enough to even know how much stock he owned.

{15} The record in this case supports a finding that the firm of Robbins

Umeda & Fink failed to keep its client informed of significant developments

in the lawsuit, including a motion for sanctions which could directly affect the

client. The Rules of Professional Conduct of the North Carolina State Bar

require:

Rule 1.4: Communication

(a) A lawyer shall:

(1) promptly inform the client of any decision or

circumstance with respect to which the client’s

12 Defense counsel brought that dismissal to the attention of the firm along with a request to

reconsider pursuit of the lawsuit. It does not appear that Mr. Egelhof was ever notified of

that development or request.

informed consent, as defined in Rule 1.0(f), is required

by these Rules;

(2) reasonably consult with the client about the means by

which the client’s objectives are to be accomplished;

(3) keep the client reasonably informed about the status of

the matter;

....

(b) A lawyer shall explain a matter to the extent reasonably

necessary to permit the client to make informed decisions

regarding the representation.

{16} Mr. Egelhof’s out-of-state counsel failed to comply with these rules.

Mr. Egelhof was only partially responsible for those failures.

{17} The firm treated the lawsuit as its own, made all litigation decisions

without input from the client, and failed to keep the client and the Court

informed of facts which were relevant to Mr. Egelhof’s standing to pursue the

litigation. While there is no evidence that the firm knew that Mr. Egelhof

had sold his stock and hid that information, it is clear that they made no

effort to stay in touch with him and discern whether anything had happened

which would have affected his standing.

{18} For his part, Mr. Egelhof failed to fulfill his acknowledged fiduciary

duties. 13 He never initiated any contact with the firm to find out what was

happening. He took no action to manage his litigation and his counsel, a duty

clearly recognized by Mr. Fink in oral argument. He even failed to let

counsel know where he could be contacted. Both Mr. Egelhof and the firm

knew he was not fulfilling his obligations. He sold his stock for his own

personal interests, without informing his counsel or the Court. He had an

affirmative duty to notify counsel and the Court before he sold his stock. At

the very least he was required to do so afterward.

{19} Neither client nor counsel communicated with each other in a

manner required of two fiduciaries. Mr. Egelhof owed a fiduciary duty to the

13 In his deposition, he acknowledged knowing that he was to remain a long term shareholder

and act in the best interest of the corporation. (Egelhoff Dep. 58–59, July 13, 2006) He was

less clear on his understanding of fiduciary duties and the meaning of a verified complaint.

(Egelhoff Dep. 73–74, July 13, 2006).

corporation he sought to represent, and the firm owed a fiduciary duty to its

client. The firm likewise had a duty to know its client and have confidence in

the client’s knowledge and ability to fulfill his or her fiduciary duties.

Shareholders may not simply lend their name to a law firm to be used in

litigation, nor may lawyers borrow the name and pursue litigation in the

firm’s interest. Nor may lawyers escape the responsibility for keeping clients

informed of developments in a case by delegating that responsibility to a

shareholders relations department; the obligation is a personal one residing

with the lawyer handling the case.

{20} In this case, when the combination of all the factors is considered,

sanctions are warranted. The plaintiff was a young novice investor with no

litigation experience and miniscule stock holdings who responded to an

Internet solicitation. The firm rushed to file a complaint on his behalf that

was defective in a number of ways and clearly ignored existing Delaware

decisions. Thereafter, neither the firm nor Mr. Egelhof fulfilled their

responsibilities. Mr. Egelhof moved without telling the firm where he could

be contacted, never took any affirmative action in connection with his

lawsuit, and ultimately sold all of his stock, forgetting that he was even

involved in the litigation. The firm never met him, didn’t know much about

him, and lost touch with him for months at a time. The firm never

communicated with him with respect to ongoing motions and activities

significant to the case and failed to transmit requests directed to him by

defense counsel. Until his deposition was ordered by the Court, he was not

even aware of the pending motion seeking sanctions against him. Mr. Fink

made an appearance without taking steps to be properly admitted. Mr.

Egelhof, the firm, and the individual lawyers have failed in their duties and

responsibilities to each other and to the Court.

{21} Accordingly, the Court concludes that sanctions are appropriate.

Those sanctions are directed to protecting the interests of parties whose

interests might be affected by representation by Mr. Egelhof, the firm or its

individual lawyers.

{22} It is, therefore, ORDERED:

1. For a period of five years from the date of this order, Andrew

Egelhof shall not act as a shareholder derivative plaintiff or a

class action representative in litigation pending in the state

courts of North Carolina;

2. Within thirty days of this order, Jeffrey P. Fink shall pay to

the North Carolina State Bar and the Clerk of Court of Wake

County an amount equal to the amounts he would have been

required to pay had he properly filed a pro hac vice motion

and been admitted to appear in this action.

3. For a period of five years from the date of this order, Brian J.

Robbins, Jeffrey P. Fink, Steven R. Wedeking, and the law

firm of Robbins Umeda & Fink, LLP are prohibited from

appearing pro hac vice in the state courts of North Carolina.

4. Defendants’ request for attorney fees and expenses is denied.

5. Mr. Williamson will insure that Mr. Egelhof receives a copy of

this order.

This 4th day of February 2008.