Aaron v. SEC

446 U.S. 680 (1980)

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Nature of the Case

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Facts

Aaron (D) was a managerial employee at E. L. Aaron & Co., a registered broker-dealer. D was charged with supervising the sales made by its registered representatives and maintaining the so-called 'due diligence' files for those securities in which the firm served as a market maker. One such security was the common stock of Lawn-A-Mat Chemical & Equipment Corp. (Lawn-A-Mat). Two registered representatives of the firm 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. They informed prospective investors that Lawn-A-Mat was planning or in the process of manufacturing a new type of small car and tractor, and that the car would be marketed within six weeks. Lawn-A-Mat, however, had no such plans. They also made projections of substantial increases in the price of Lawn-A-Mat common stock and optimistic statements concerning the company's financial condition. Lawn-A-Mat was losing money during the relevant period. An officer of Lawn-A-Mat informed the representatives that their statements were false and misleading and requested them to cease making such statements. The request was ignored. An attorney representing Lawn-A-Mat, communicated with D twice by telephone. D was informed of the false and misleading statements. D took no affirmative steps to prevent false statements. P filed a complaint D and seven others in connection with the offer and sale of Lawn-A-Mat common stock. P sought a preliminary and final injunctive relief pursuant to §20 (b) of the 1933 Act and §21 (d) of the 1934 Act, in that D had violated and aided and abetted violations of three provisions -- § 17 (a) of the 1933 Act, § 10 (b) of the 1934 Act, and Commission Rule 10b-5 promulgated under that section of the 1934 Act. The Court found that D had violated and aided and abetted violations of § 17 (a), § 10 (b), and Rule 10b-5 during the Lawn-A-Mat sales campaign and enjoined him from future violations of these provisions. It found that D had intentionally failed to discharge his supervisory responsibility. The Court concluded that D knowingly aided and abetted the fraud. D appealed. The Court of Appeals held that 'proof of negligence alone will suffice' to establish a violation of §17 (a), §10(b), and Rule 10b-5. The conclusion of the Court of Appeals that the scienter requirement of Hochfelder does not apply to Commission enforcement proceedings was said to find support in the language of §10(b). The Supreme Court granted certiorari.