## Facts

- Peter E. Aaron was a managerial employee at E.L. Aaron & Co., a registered broker-dealer, with supervisory responsibility over sales personnel and maintenance of “due diligence” files for securities the firm traded as a market maker.
- The firm made a market in Lawn-A-Mat Chemical & Equipment Corp. common stock.
- Two registered representatives conducted a sales campaign for Lawn-A-Mat stock and repeatedly made false and misleading statements to solicit orders, including claims that Lawn-A-Mat was manufacturing a new small car and tractor to be marketed within weeks, despite having no such plans.
- The representatives also made unfounded optimistic projections about the stock price and the company’s financial condition while the company was losing money.
- After investor complaints, a Lawn-A-Mat officer told the salesmen their statements were false and asked them to stop; the sales campaign continued.
- Lawn-A-Mat’s attorney twice warned Aaron that the representatives were making specific false statements.
- Aaron had additional reason to know the statements were false because the due-diligence materials reflected a deteriorating financial condition and contained no plans for vehicle manufacturing.
- The SEC alleged Aaron failed to stop or correct the misrepresentations and thereby committed, or aided and abetted, antifraud violations.

## Issues

1. Whether the SEC must prove scienter to obtain injunctive relief for violations of Exchange Act § 10(b) and SEC Rule 10b-5.
2. Whether the SEC must prove scienter to obtain injunctive relief for violations of Securities Act § 17(a)(1), § 17(a)(2), and § 17(a)(3).
3. Whether the “upon a proper showing” language in the securities-law injunction provisions alters the mental-state requirements of the underlying antifraud provisions.

## Decision

- The Supreme Court vacated the judgment and remanded.
- Scienter is required to enjoin violations of Exchange Act § 10(b) and Rule 10b-5, regardless of whether the plaintiff is the SEC and regardless of the equitable nature of the remedy.
- Scienter is required to enjoin violations of Securities Act § 17(a)(1).
- Scienter is not required to enjoin violations of Securities Act § 17(a)(2) or § 17(a)(3); negligence is sufficient for those subsections.
- The statutory authorization to seek injunctions “upon a proper showing” concerns the showing needed for equitable relief (including likelihood of future violations), not the elements of the substantive antifraud violation.

## Legal Principles

- Scienter is an element of a violation of Exchange Act § 10(b) and Rule 10b-5 in SEC civil enforcement actions seeking injunctions, not only in private damages actions.
- Securities Act § 17(a) contains different mental-state requirements by subsection:
  - § 17(a)(1) (“device, scheme, or artifice to defraud”) requires scienter.
  - § 17(a)(2) (obtaining money or property by material misstatement or omission) may be established by negligence.
  - § 17(a)(3) (conduct that operates as a fraud or deceit) may be established by negligence.
- Injunction provisions authorizing relief “upon a proper showing” do not eliminate or reduce the mental-state elements built into the substantive antifraud provisions; they address the prerequisites for equitable relief, including the likelihood of future violations.

## Conclusion

The Court held that the SEC must prove scienter to obtain injunctions under Exchange Act § 10(b) and Rule 10b-5 and under Securities Act § 17(a)(1), but need only prove negligence for injunctions under § 17(a)(2) and § 17(a)(3), and it remanded for further proceedings under the correct standards.


Aaron v. SEC, 446 U.S. 680 (1980)