## Facts

- A shareholder (Neal DeLeo) filed a federal shareholder derivative action on behalf of Easy Access International, Inc. (EAI) against an EAI director/officer (Swirsky) and others, alleging fraud and insider misconduct involving EAI’s wholly owned subsidiary, Zconnexx Corporation.
- DeLeo was represented in the Illinois derivative action by Bruce Golden, who was also proposed to serve as class/derivative counsel.
- DeLeo (personally) and a separate corporation he half-owned (Internet Yellow Pages Network, Inc.) pursued a related New York state action against Swirsky and overlapping defendants, seeking personal recovery for alleged fraud and misappropriation tied to the same events.
- The New York action was stayed due to bankruptcy proceedings involving Zconnexx and another defendant.
- Defendant Swirsky moved in the Illinois action to disqualify DeLeo as class representative and Golden as class/derivative counsel, alleging conflicts of interest created by the New York litigation and DeLeo’s personal financial interests.

## Issues

1. Whether a defendant who is not a current or former client of the challenged lawyer has standing to move to disqualify opposing counsel based on conflicts.
2. Whether counsel’s simultaneous representation in the Illinois derivative action and the related New York action created a conflict requiring disqualification as class/derivative counsel.
3. Whether the proposed class/derivative representative’s personal interests and participation in related litigation rendered him inadequate to represent EAI shareholders.

## Decision

- The court held Swirsky lacked standing, as a non-client, to seek Golden’s disqualification.
- Despite denying the motion on standing grounds, the court addressed the conflicts on its own initiative and disqualified Golden from serving as class/derivative counsel.
- The court also disqualified DeLeo as lead plaintiff and class representative because his interests materially diverged from those of absent EAI shareholders.
- The court indicated the action could proceed with a conflict-free representative and counsel.

## Legal Principles

- Disqualification motions based on conflicts are generally limited, for standing purposes, to current or former clients whose confidential information or loyalty interests are implicated.
- A court retains inherent authority to supervise attorneys and may act sua sponte to correct conflicts that threaten the fairness and integrity of proceedings, particularly in representative litigation.
- In class and derivative actions, counsel must provide undivided loyalty to the class/corporation; concurrent representation of competing claimants arising from the same transactions may require disqualification.
- Adequacy of representation under Rule 23(a)(4) is defeated where the proposed representative has competing financial incentives or litigation positions that could affect strategy, settlement, or allocation of recovery to the detriment of absent shareholders.
- Conflicts in representative litigation may be treated as effectively non-waivable because absent class members and the corporation cannot meaningfully consent to representation compromised by divided loyalties.

## Conclusion

The court denied the defendant’s attempt to disqualify counsel for lack of standing, but exercised its own authority to protect absent shareholders by disqualifying both the proposed class/derivative counsel and the proposed representative due to conflicts created by parallel litigation seeking personal recovery from the same alleged misconduct.


DeLeo v. Swirsky, No. 00 C 6917, 2002 WL 989526 (N.D. Ill. May 13, 2002)