Aaron vs. Securities and Exchange Commission Page 1 of 1 Citation: 446 U.S. 680 No. 79-66.

(1980) Summary: Two representatives under the supervision of petitioner, of the subject firm, caused the spread of false statements against Law-A-Mats supposed manufacture of small car and tractor. Upon knowledge of fraudulent practices of employees of the said firm, Law-A-Mat called the attention of the petitioner but did not heed their demand. Petitioner, having knowledge of the fraudulent practices and did not exercised adequate measures to stop it, constituted a violation of Acts 1933, 1934 and R10b-5. Facts: Two registered representatives (Norman Schreiber and Donald Jacobson) of a registered broker firm (E. L. Aaron & Co) conducted false sales campaign misleading investors that Lawn-A-Mat, engaged in lawn-care franchises and supplying its franchisees with products and equipment, was manufacturing a small car and tractor in order for Schreiber and Jacobson to solicit orders for the purchase of Lawn-A-Mats common stock. The two representatives even made projections of substantially increasing the price of Lawn-A-Mats common stock and telling everyone regarding the optimistic condition of Lawn-A-Mats finances where in truth of the fact, Lawn-AMat was losing money during that period. Upon knowledge of the fraudulent practices, Lawn-A-Mat informed the petitioner but he did not heed to their demand. Petitioner took no affirmative steps to stop the two representatives. Commission filed a complaint against the petitioner and seven other defendants in connection with the offer and sale of Lawn-A-Mat common stock. Subsequently, Commission sought for a preliminary and final injunctive relief alleging that petitioner in abetting and aiding, violated provisions under 1933 and 1934 Acts and the Commission Rule 10.5. Respondent contended that petitioner, by reason of his function, had knowledge of the fraudulent practices of the two representatives but failed to exercise adequate measures in order to stop them. The Court ruled against the Petitioner for failing to exercise his supervisory responsibility in preventing continuance of the fraudulent acts of the two representatives, which was thereafter, affirmed by Court of Appeals. The remedy was likewise warranted considering the nature of petitioners conduct and likelihood of committing the same. Hence the instant petition for certiorari. Issue: Whether the Securities and Exchange Commission is required to establish scienter -- intent on the part of the defendant to deceive, manipulate, or defraud, in view of petitioners conduct to enjoin violations of the Securities Act of 1933 and Securities Act of 1934 and Commission Rule 10b-5 promulgated of the 1934 Act. Holding: Yes, it is required for SEC to determine scienter under 17 (a) (1) of 1933 and Rule 10b-5, but not under 17 (a) (2) or 17 (a) (3) Court of Appeals erred in issuing an injunction without proving scienter. Procedure: The judgment of the Court of Appeals is reversed, and remanded for further proceedings. Rule: Sections 20 (b) and 21 (d) provide that the Commission may seek injunctive relief whenever it appears that a person "is engaged or [is] about to engage in any acts or practices" constituting a violation of the 1933 or 1934 Acts and "upon a proper showing," a district court shall grant the injunction. With respect to 17 (a) (2) and 17 (a) (3), it may be violated even in the absence of scienter. When scienter is an element of the substantive violation sought to be enjoined, it must be proved before an injunction may issue Rationale: The language and legislative history of 20 (b) and 21 (d) both indicate that Congress intended neither to add to nor to detract from the requisite showing of scienter under the substantive provisions at issue. The elements of "a proper showing" thus include, at a minimum, proof that a person is engaged in or is about to, in substantive violation of either one of the Acts or regulations subject in this case. Meanwhile 20 (b) or 21 (d) does not provide an independent requirement of scienter, same as nothing in the legislative history of either provision to suggest the contrary.