446 U.S. 680 (1980)
When the events giving rise to this enforcement proceeding occurred, the petitioner Aaron was a managerial employee at E. L. Aaron & Co., a registered broker-dealer with its principal office in New York City.1 Among other responsibilities at the firm, Aaron was charged with supervising the sales made by its registered representatives and maintaining the due diligence files for those securities in which the firm served as a market maker, including the common stock of Lawn-A-Mat Chemical & Equipment Corp.2
Between November 1974 and September 1975, two registered representatives of the firm, Norman Schreiber and Donald Jacobson, conducted a sales campaign in which they repeatedly made false and misleading statements in an effort to solicit orders for the purchase of Lawn-A-Mat common stock.3 Schreiber and Jacobson informed prospective investors that Lawn-A-Mat was planning or in the process of manufacturing a new type of small car and tractor that would be marketed within six weeks.4 Schreiber and Jacobson also made projections of substantial increases in the price of Lawn-A-Mat common stock and optimistic statements concerning the company's financial condition.5 Lawn-A-Mat, however, had no such plans.6 These projections and statements were without basis in fact, since Lawn-A-Mat was losing money during the period between November 1974 and September 1975.7
Upon receiving several complaints from prospective investors, an officer of Lawn-A-Mat informed Schreiber and Jacobson that their statements were false and misleading and requested them to cease making such statements.8 This request went unheeded.9 Thereafter, Milton Kean, an attorney representing Lawn-A-Mat, communicated with Aaron twice by telephone and informed him that Schreiber and Jacobson were making false and misleading statements and described the substance of what they were saying.10 Aaron had reason to know that the statements were false because he knew that the reports in Lawn-A-Mat's due diligence file indicated a deteriorating financial condition and revealed no plans for manufacturing a new car and tractor.11 Although assuring Kean that the misrepresentations would cease, Aaron took no affirmative steps to prevent their recurrence beyond informing Jacobson of Kean's complaint and directing him to communicate with Kean.12
In February 1976, the Commission filed a complaint in the District Court for the Southern District of New York against Aaron and seven other defendants in connection with the offer and sale of Lawn-A-Mat common stock.13 The Commission alleged that Aaron had violated and aided and abetted violations of section 17(a) of the 1933 Act, section 10(b) of the 1934 Act, and Commission Rule 10b-5.14 Before commencement of the trial, all the defendants except Aaron consented to the entry of permanent injunctions against them.15 Following a bench trial, the District Court found that Aaron had violated and aided and abetted violations of the three provisions during the Lawn-A-Mat sales campaign and enjoined him from future violations.16 The Court of Appeals for the Second Circuit affirmed the judgment.17 The Supreme Court granted certiorari to resolve the conflict in the federal courts as to whether the Commission is required to establish scienter as an element of a Commission enforcement action to enjoin violations of section 17(a), section 10(b), and Rule 10b-5.18
Whether the Securities and Exchange Commission must establish scienter as an element of a civil enforcement action to enjoin violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5?19
The language of section 10(b) and its legislative history require scienter as an element of a violation, as established in Ernst & Ernst v. Hochfelder, and this requirement applies to Commission enforcement actions for injunctive relief as well as private damages actions.20
Yes. The terms manipulative, device, and contrivance in section 10(b) evince a congressional intent to proscribe only knowing or intentional misconduct.21 Aaron's intentional failure to discharge his supervisory responsibility to stop Schreiber and Jacobson from making statements that he knew to be false and misleading satisfies the scienter requirement for the Commission to obtain an injunction.22
The Commission must establish scienter as an element of a civil enforcement action to enjoin violations of section 10(b) and Rule 10b-5.23
Related opinions on this issue
Chief Justice Burger joined the opinion of the Court.24 He wrote separately to emphasize that the District Court was correct in entering an injunction against petitioner.25 Aaron was informed by an attorney representing Lawn-A-Mat that two representatives of petitioner's firm were making grossly fraudulent statements to promote Lawn-A-Mat stock.26
Yet he took no steps to prevent such conduct from recurring.27 He agreed that section 10(b) and section 17(a)(1) require scienter but that section 17(a)(2) and section 17(a)(3) do not.28 Congress has driven the wedge between sellers and buyers.29
He also noted that the requirement of showing a reasonable likelihood that the wrong will be repeated. It will almost always be necessary for the Commission to demonstrate that the defendant's past sins have been the result of more than negligence.30
Joined by Justice Brennan And Justice Marshall
Justice Blackmun concurred in the judgment that sections 17(a)(2) and (3) do not require a showing of scienter but dissented from the remainder of the Court's reasoning and judgment.31 He argued that neither section 17(a)(1) nor section 10(b) requires the Commission to prove scienter before it can obtain equitable protection against deceptive practices in securities trading.32 He believed that there are sound reasons for distinguishing between private damages actions and public enforcement actions under these statutes, and for applying a scienter standard only in the former class of cases.33
Whether the Securities and Exchange Commission must establish scienter as an element of a civil enforcement action to enjoin violations of section 17(a) of the Securities Act of 1933?34
The language of section 17(a) requires scienter under subsection (1) but not under subsections (2) or (3).35
No. Although scienter is required under section 17(a)(1), it is not required under section 17(a)(2) or section 17(a)(3).36 The Commission may obtain an injunction for violations of the latter two subsections based on Aaron's conduct in failing to prevent the false statements even if his failure was merely negligent.37
The Commission must establish scienter for violations of section 17(a)(1) but not for violations of section 17(a)(2) and section 17(a)(3).38
Related opinions on this issue
Chief Justice Burger joined the opinion of the Court. He wrote separately to emphasize that the District Court was correct in entering an injunction against petitioner. Aaron was informed by an attorney representing Lawn-A-Mat that two representatives of petitioner's firm were making grossly fraudulent statements to promote Lawn-A-Mat stock.
Yet he took no steps to prevent such conduct from recurring. He agreed that section 10(b) and section 17(a)(1) require scienter but that section 17(a)(2) and section 17(a)(3) do not. Congress has driven the wedge between sellers and buyers.
He also noted that the requirement of showing a reasonable likelihood that the wrong will be repeated. It will almost always be necessary for the Commission to demonstrate that the defendant's past sins have been the result of more than negligence.
Joined by Justice Brennan And Justice Marshall
Justice Blackmun concurred in the judgment that sections 17(a)(2) and (3) do not require a showing of scienter but dissented from the remainder of the Court's reasoning and judgment. He argued that neither section 17(a)(1) nor section 10(b) requires the Commission to prove scienter before it can obtain equitable protection against deceptive practices in securities trading. He believed that there are sound reasons for distinguishing between private damages actions and public enforcement actions under these statutes, and for applying a scienter standard only in the former class of cases.