The Formal Notice Requirement Behind Rule 11 Sanctions: Why an Informal Threat Should Not Be Treated as a Binding Promise

Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review

Talk is cheap, put your money where your mouth is, et cetera—all idioms that reflect a common underlying theme that in order for one’s statements to be taken seriously, one must take a formal action threatening stern consequences. Anything less, and others will think the statements insignificant. In a recent decision from the Sixth Circuit Court of Appeals in Penn LLC v. Prosper Bus. Dev. Corp., the court found that the same theme applies to civil procedure—that for purposes of Rule 11 sanctions, an informal warning letter is insufficient, and formal service of a motion is required.[1] While other circuit courts have reached similar conclusions,[2] the Seventh Circuit disagrees, holding that strict compliance with the formalities of the sanctions process is not required.[3] However, in consideration of the court’s textual arguments, policy rationale, and practical implications, the reasoning of the Sixth Circuit is more persuasive, and other jurisdictions should not follow the Seventh Circuit’s interpretation of Rule 11.

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Gaming the System: Are Ponzi Schemers Receiving Proper Criminal Sentences?

Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review

Ponzi schemes have existed for many years and their internal structure is well understood. Schemers solicit funds from individuals as “investments,” but keep the money themselves and pay “returns” to those investors from additional funds that are received from other new investors.[1] Consequently, the “returns” paid out attract more new investors to invest in the scheme, whose funds are then used to pay out more false “returns” to current investors, thus perpetuating the scheme. The fundamental component of this scheme is the pay out of fake returns. Without these payouts, the scheme would not attract new investors and would not grow and continue to profit the schemer.

Should the sheer act of paying out false “returns” to investors—an essential element of the scheme itself—allow operators of a Ponzi scheme to receive shortened lengths of criminal sentences? While some circuits do not allow fraudulent returns to mitigate sentencing lengths, the Sixth Circuit Court of Appeals recently held that, for purposes of calculating the range of criminal sentencing, the money paid back to a Ponzi scheme’s investors as “returns” on their investments offsets the victims’ total loss from fraud, and thus automatically lessens the length of criminal sentencing.[2]

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“Costanza Defense” Potentially No Longer Applicable in Class Action Securities Claims

Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review

George Costanza once imparted to Jerry Seinfeld the infamous advice, “It’s not a lie, if you believe it.”[1] Although this advice is entertaining, the Supreme Court granted certiorari last March to resolve a circuit split regarding the extent to which Mr. Costanza’s advice applies in class action securities litigation.[2] The Supreme Court will review the Sixth Circuit’s decision in Indiana State District Council v. Omnicare, Inc. from May 23, 2013.[3] The Court will likely determine the pleading standard for plaintiff-investors filing suit under § 11 of the Securities Act of 1933 (§ 11 or section 11) against a defendant-corporation. In particular, the Court will determine whether the plaintiff’s plea that the defendant’s misstatement or omission was objectively false satisfies federal pleading requirements, or whether the plaintiff must also plead that the defendant subjectively knew that the misstatement or omission was misrepresentative.[4]

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