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

Annotate this Case

U.S. Supreme Court

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

Aaron v. SEC

No. 79-66

Argued February 25, 1980

Decided June 2, 1980

446 U.S. 680

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

Section 17(a) of the Securities Act of 1933 (1933 Act) makes it unlawful for any person in the offer or sale of any security "(1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact . . or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." Section 10(b) of the Securities Exchange Act of 1934 (1934 Act) makes it unlawful to use, in connection with the purchase or sale of any security, "any manipulative or deceptive device or contrivance" in violation of such regulations as the Securities and Exchange Commission (SEC) may prescribe, and Rule 10b-5 was promulgated to implement this section. Section 20(b) of the 1933 Act and § 21(d) of the 1934 Act authorize the SEC to seek injunctive relief against violations of the respective Acts, and further provide that, "upon a proper showing," a district court shall grant the injunction. Pursuant to §§ 20(b) and 21(d), the SEC filed a complaint in a District Court against petitioner, a managerial employee of a broker-dealer, alleging that he had violated, and aided and abetted violations of, § 17(a) of the 1933 Act, § 10(b) of the 1934 Act, and SEC Rule 10b, in connection with his firm's sales campaign for certain securities. Concluding that there was scienter on petitioner's part, the District Court found that he had committed and aided and abetted the violations as alleged. The Court of Appeals affirmed, declining to decide whether petitioner's conduct would support a finding of scienter and holding instead that, when the SEC is seeking injunctive relief, proof of negligence alone will suffice.

Held: The SEC is required to establish scienter as an element of a civil enforcement action to enjoin violations of § 10(b) of the 1934 Act, Rule 105, and § 17(a)(1) of the 1933 Act, but need not establish scienter as an element of an action to enjoin violations of §§ 17(a)(2) and 17(a)(3) of the 1933 Act. Pp. 446 U. S. 687-702.

(a) Scienter is an element of violations of § 10(b) and Rule 10b-5, regardless of the identity of the plaintiff or the nature of the relief

Page 446 U. S. 681

sought. Ernst & Ernst v. Hochfelder,425 U. S. 185. Section 10(b)'s language, particularly t.he terms "manipulative," "device," and "contrivance," clearly refer to "knowing and intentional misconduct," and the section's legislative history also points toward a scienter requirement. SEC v. Capital Gains Research Bureau,375 U. S. 180, distinguished. Pp. 446 U. S. 689-695.

(b) Section 17(a)(1)'s language, "to employ any device, scheme, or artifice to defraud," plainly evinces an intent on Congress' part to proscribe only knowing or intentional misconduct. By contrast, § 17(a)(2)'s language, "by means of any untrue statement of a material fact or any omission to state a material fact," is devoid of any suggestion of a scienter requirement. And § 17(a)(3)'s language, "to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit," plainly focuses upon the effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible. Cf. SEC v. Capital Gains Research Bureau, supra. There is nothing in § 17(a)'s legislative history to show a congressional intent contrary to the conclusion that scienter is thus required under § 17(a)(1) but not under §§ 17(a)(2) and 17(a)(3). Pp. 446 U. S. 695-700.

(c) The language and legislative history of §§ 20(b) and 21(d) both indicate that Congress intended neither to add to nor detract from the requisite showing of scienter under the substantive provisions at issue. Pp. 446 U. S. 700-701.

605 F.2d 612, vacated and remanded.

STEWART, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, POWELL, REHNQUIST, and STEVENS, JJ., joined. BURGER, C.J., filed a concurring opinion, post, p. 446 U. S. 702. BLACKMUN, J., filed an opinion concurring in part and dissenting in part, in which BRENNAN, and MARSHALL, JJ., joined, post, p. 446 U. S. 703.

Page 446 U. S. 682

MR. JUSTICE STEWART delivered the opinion of the Court.

The issue in this case is whether the Securities and Exchange Commission (Commission) is required to establish scienter as an element of a civil enforcement action to enjoin violations of § 17(a) of the Securities Act of 1933 (1933 Act), § 10(b) of the Securities Exchange Act of 1934 (1934 Act), and Commission Rule 10b-5 promulgated under that section of the 1934 Act.

I

When the events giving rise to this enforcement proceeding occurred, the petitioner was a managerial employee at E. L. Aaron & Co. (the firm), a registered broker-dealer with its principal office in New York City. Among other responsibilities at the firm, the petitioner 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), a company engaged in the business of selling lawn-care franchises and supplying its franchisees with products and equipment.

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. During the course of this promotion, 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, and that the car would be marketed within six weeks. Lawn-A-Mat, however, had no such plans. The two registered representatives also made projections of

Page 446 U. S. 683

substantial increases in the price of Lawn-A-Mat common stock and optimistic statements concerning the company's financial condition. These projections and statements were without basis in fact, since Lawn-A-Mat was losing money during the relevant period.

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. This request went unheeded.

Thereafter, Milton Kean, an attorney representing Lawn-A-Mat, communicated with the petitioner twice by telephone. In these conversations, Kean informed the petitioner that Schreiber and Jacobson were making false and misleading statements and described the substance of what they were saying. The petitioner, in addition to being so informed by Kean, had reason to know that the statements were false, since 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. Although assuring Kean that the misrepresentations would cease, the petitioner took no affirmative steps to prevent their recurrence. The petitioner's only response to the telephone calls was to inform Jacobson of Kean's complaint and to direct him to communicate with Kean. Otherwise, the petitioner did nothing to prevent the two registered representatives under his direct supervision from continuing to make false and misleading statements in promoting Lawn-A-Mat common stock.

In February, 1976, the Commission filed a complaint in the District Court for the Southern District of New York against the petitioner and seven other defendants in connection with the offer and sale of Lawn-A-Mat common stock. In seeking preliminary and final injunctive relief pursuant to § 2(b) of the 1933 Act and § 21(d) of the 1934 Act, the Commission alleged that the petitioner had violated and aided and abetted

Page 446 U. S. 684

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. [Footnote 1] The gravamen of the charges against the petitioner was that he knew or had reason to know that the employees under his supervision were engaged in fraudulent practices, but failed to take adequate steps to prevent those practices from continuing. Before commencement of the trial, all the defendants except the petitioner consented to the entry of permanent injunctions against them.

Following a bench trial, the District Court found that the petitioner 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. [Footnote 2] The District Court's finding of past violations was based upon its factual finding that the petitioner had intentionally failed to discharge his supervisory responsibility to stop Schreiber and Jacobson from making statements to prospective investors that the petitioner knew to be false and misleading. Although noting that negligence alone might suffice to establish a violation of the relevant provisions in a Commission enforcement action, the District Court concluded that the fact that the petitioner

"intentionally failed to terminate the false and misleading statements made by Schreiber and Jacobson knowing them to be fraudulent, is sufficient to establish his scienter under the securities laws."

As to the remedy, even though the firm had since gone bankrupt and the petitioner was no longer working for a broker-dealer,

Page 446 U. S. 685

the District Court reasoned that injunctive relief was warranted in light of

"the nature and extent of the violations . . the [petitioner's] failure to recognize the wrongful nature of his conduct and the likelihood of the [petitioner's] repeating his violative conduct."

The Court of Appeals for the Second Circuit affirmed the judgment. 605 F.2d 612. Declining to reach the question whether the petitioner's conduct would support a finding of scienter, the Court of Appeals held instead that, when the Commission is seeking injunctive relief, "proof of negligence alone will suffice" to establish a violation of § 17(a), § 10(b), and Rule 10b-5. Id. at 619. With regard to § 10(b) and Rule 10b-5, the Court of Appeals noted that this Court's opinion in Ernst & Ernst v. Hochfelder,425 U. S. 185, which held that an allegation of scienter is necessary to state a private cause of action for damages under § 10(b) and Rule 10b-5, had expressly reserved the question whether scienter must be alleged in a suit for injunctive relief brought by the Commission. Id. at 425 U. S. 194, n. 12. 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 legislative history of the 1934 Act, the relationship between § 10(b) and the overall enforcement scheme of the securities laws, and the "compelling distinctions between private damage actions and government injunction actions." [Footnote 3] For its holding that scienter

Page 446 U. S. 686

is not a necessary element in a Commission injunctive action to enforce § 17(a), the Court of Appeals relied on its earlier decision in SEC v. Coen, 581 F.2d 1020 (1978). There that court had noted that the language of § 17(a) contains nothing to suggest a requirement of intent, and that, in enacting § 17(a), Congress had considered a scienter requirement, but instead "opted for liability without willfulness, intent to defraud, or the like." Id. at 1027-1028. [Footnote 4] Finally, the Court of Appeals affirmed the District Court's holding that, under all the facts and circumstances of this case, the Commission was entitled to injunctive relief. 605 F.2d at 623-624.

We granted certiorari to resolve the conflict in the federal courts as to whether the Commission is required to establish scienter -- an intent on the part of the defendant to deceive, manipulate, or defraud [Footnote 5] -- as an element of a Commission enforcement action to enjoin violations of § 17(a), [Footnote 6] § 10(b), and Rule 10b-5. [Footnote 7] 444 U.S. 914.

Page 446 U. S. 687

II

The two substantive statutory provisions at issue here are § 17(a) of the 1933 Act, 48 Stat. 84, as amended, 15 U.S.C. § 77q(a), and § 10(b) of the 1934 Act, 48 Stat. 891, 15 U.S.C. § 78j(b). Section 17(a), which applies only to sellers, provides:

"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly -- "

"(1) to employ any device, scheme, or artifice to defraud, or"

"(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or"

"(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

Section 10(b), which applies to both buyers and sellers, makes it

"unlawful for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Pursuant to its rulemaking

Page 446 U. S. 688

power under this section, the Commission promulgated Rule 10b-5, which now provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,"

"(a) To employ any device, scheme, artifice to defraud,"

"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or"

"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

17 CFR § 240.10b-5 (1979).

The civil enforcement mechanism for these provisions consists of both express and implied remedies. One express remedy is a suit by the Commission for injunctive relief. Section 20(b) of the 1933 Act, 48 Stat. 86, as amended, as set forth in 15 U.S.C. § 77t(b), provides:

"Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this subchapter [e.g., § 17(a)], or of any rule or regulation prescribed under authority thereof, it may in its discretion, bring an action in any district court of the United States . . . to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond."

Similarly, § 21(d) of the 1934 Act, 48 Stat. 900, as amended, 15 U.S.C. § 78u(d), authorizes the Commission to seek injunctive relief whenever it appears that a person "is engaged or is about to engage in acts or practices constituting"

Page 446 U. S. 689

a violation of the 1934 Act (e.g., § 10(b)), or regulations promulgated thereto (e.g., Rule 10b-5), and requires a district court, "upon a proper showing," to grant injunctive relief.

Another facet of civil enforcement is a private cause of action for money damages. This remedy, unlike the Commission injunctive action, is not expressly authorized by statute, but rather has been judicially implied. See Ernst & Ernst v. Hochfelder, 425 U.S. at 425 U. S. 196-197. Although this Court has repeatedly assumed the existence of an implied cause of action under § 10(b) and Rule 10b-5, see Ernst & Ernst v. Hochfelder, supra; Blue Chip Stamps v. Manor Drug Stores,421 U. S. 723, 421 U. S. 730; Affiliated Ute Citizens v. United States,406 U. S. 128, 406 U. S. 150-154; Superintendent of Insurance v. Bankers Life & Cas. Co.,404 U. S. 6, 404 U. S. 13, n. 9, it has not had occasion to address the question whether a private cause of action exists under § 17(a). See Blue Chip Stamps v. Manor Drug Stores, supra at 421 U. S. 733, n. 6.

The issue here is whether the Commission, in seeking injunctive relief either under § 20(b) for violations of § 17(a) or under § 21(d) for violations of § 10(b) or Rule 10b-5, is required to establish scienter. Resolution of that issue could depend upon (1) the substantive provisions of § 17(a), § 10(b), and Rule 10b-5, or (2) the statutory provisions authorizing injunctive relief "upon a proper showing," § 20(b) and § 21(d). We turn to an examination of each to determine the extent to which they may require proof of scienter.

A

In determining whether scienter is a necessary element of a violation of § 10(b) and Rule 10b-5, we do not write on a clean slate. Rather, the starting point for our inquiry is Ernst & Ernst v. Hochfelder, supra, a case in which the Court concluded that a private cause of action for damages will not lie under § 10(b) and Rule 10b-5 in the absence of an allegation of scienter. Although the issue presented in the

Page 446 U. S. 690

present case was expressly reserved in Hochfelder, supra at 425 U. S. 193, n. 12, we nonetheless must be guided by the reasoning of that decision.

The conclusion in Hochfelder that allegations of simple negligence could not sustain a private cause of action for damages under § 10(b) and Rule 10b-5 rested on several grounds. The most important was the plain meaning of the language of § 10(b). It was the view of the Court that the terms "manipulative," "device," and "contrivance" -- whether given their commonly accepted meaning or read as terms of art -- quite clearly evinced a congressional intent to proscribe only "knowing or intentional misconduct." 425 U.S. at 425 U. S. 197-199. This meaning, in fact, was thought to be so unambiguous as to suggest that "further inquiry may be unnecessary." Id. at 425 U. S. 201.

The Court in Hochfelder nonetheless found additional support for its holding in both the legislative history of § 10(b) and the structure of the civil liability provisions in the 1933 and 1934 Acts. The legislative history, though "bereft of any explicit explanation of Congress' intent," contained "no indication . . . that § 10(b) was intended to proscribe conduct not involving scienter." Id. at 425 U. S. 201-202. Rather, as the Court noted, a spokesman for the drafters of the predecessor of § 10(b) described its function as a "catch-all clause to prevent manipulative devices.'" Id. at 425 U. S. 202. This description, as well as various passages in the Committee Reports concerning the evils to which the 1934 Act was directed, evidenced a purpose to proscribe only knowing or intentional misconduct. Moreover, with regard to the structure of the 1933 and 1934 Acts, the Court observed that, in each instance in which Congress had expressly created civil liability, it had specified the standard of liability. To premise civil liability under § 10(b) on merely negligent conduct, the Court concluded, would run counter to the fact that, wherever Congress intended to accomplish that result, it said so expressly and subjected such actions to significant procedural restraints not applicable to § 10(b).

Page 446 U. S. 691

Id. at 425 U. S. 206-211. Finally, since the Commission's rulemaking power was necessarily limited by the ambit of its statutory authority, the Court reasoned that Rule 10b.-5 must likewise be restricted to conduct involving scienter. [Footnote 8]

In our view, the rationale of Hochfelder ineluctably leads to the conclusion that scienter is an element of a violation of § 10(b) and Rule 10b-5, regardless of the identity of the plaintiff or the nature of the relief sought. Two of the three factors relied upon in Hochfelder -- the language of § 10(b) and its legislative history -- are applicable whenever a violation of § 10(b) or Rule 10b-5 is alleged, whether in a private cause of action for damages or in a Commission injunctive action under § 21(d). [Footnote 9] In fact, since Hochfelder involved an implied cause of action that was not within the contemplation of the Congress that enacted § 10(b), id. at 425 U. S. 196, it would be quite anomalous in a case like the present one, involving as it does the express remedy Congress created for § 10(b) violations, not to attach at least as much significance to the fact that the statutory language and its legislative history support a scienter requirement.

The Commission argues that Hochfelder, which involved a private cause of action for damages, is not a proper guide in construing § 10(b) in the present context of a Commission enforcement action for injunctive relief. We are urged instead to look to SEC v. Capital Gains Research Bureau, 375 U.S.

Page 446 U. S. 692

18. That case involved a suit by the Commission for injunctive relief to enforce the prohibition in § 206(2) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, against any act or practice of an investment adviser that "operates as a fraud or deceit upon any client or prospective client." The injunction sought in Capital Gains was to compel disclosure of a practice known as "scalping," whereby an investment adviser purchases shares of a given security for his own account shortly before recommending the security to investors as a long-term investment, and then promptly sells the shares at a profit upon the rise in their market value following the recommendation.

The issue in "Capital Gains" was whether, in an action for injunctive relief for violations of § 206(2), [Footnote 10] the Commission must prove that the defendant acted with an intent to defraud. The Court held that a showing of intent was not required. This conclusion rested upon the fact that the legislative history revealed that the

"Investment Advisers Act of 1940 . . . reflects a congressional recognition 'of the delicate fiduciary nature of an investment advisory relationship,' as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser -- consciously or unconsciously -- to render advice which

Page 446 U. S. 693

was not disinterested."

375 U.S. at 375 U. S. 91-192 (footnote omitted). To require proof of intent, the Court reasoned, would run counter to the expressed intent of Congress.

The Court added that its conclusion was "not in derogation of the common law of fraud." Id. at 375 U. S. 192. Although recognizing that intent to defraud was a necessary element at common law to recover money damages for fraud in an arm's length transaction, the Court emphasized that the Commission's action was not a suit for damages, but rather a suit for an injunction in which the relief sought was the "mild prophylactic" of requiring a fiduciary to disclose his transactions in stocks he was recommending to his clients. Id. at 375 U. S. 193. The Court observed that it was not necessary in a suit for "equitable or prophylactic relief" to establish intent, for "[f]raud has a broader meaning in equity [than at law] and intention to defraud or to misrepresent is not a necessary element." Ibid., quoting W. De Funiak, Handbook of Modern Equity 235 (2d ed.1956). Moreover, it was not necessary, the Court said, in a suit against a fiduciary such as an investment adviser, to establish all the elements of fraud that would be required in a suit against a party to an arm's length transaction. Finally, the Court took cognizance of a

"growing recognition by common law courts that the doctrines of fraud and deceit which developed around transactions involving land and other tangible items of wealth are ill-suited to the sale of such intangibles as advice and securities, and that, accordingly, the doctrines must be adapted to the merchandise in issue."

375 U.S. at 375 U. S. 194. Unwilling to assume that Congress was unaware of these developments at common law, the Court concluded that they "reinforce[d]" its holding that Congress had not sought to require a showing of intent in actions to enjoin violations of § 206(2). Id. at 375 U. S. 195.

The Commission argues that the emphasis in Capital Gains upon the distinction between fraud at law and in equity should guide a construction of § 10(b) in this suit for injunctive

Page 446 U. S. 694

relief. [Footnote 11] We cannot, however, draw such guidance from Capital Gains for several reasons. First, wholly apart from its discussion of the judicial treatment of "fraud" at law and in equity, the Court in Capital Gains found strong support in the legislative history for its conclusion that the Commission need not demonstrate intent to enjoin practices in violation of § 206(2). By contrast, as the Court in Hochfelder noted, the legislative history of § 10(b) points towards a scienter requirement. Second, it is quite clear that the language in question in Capital Gains, "any . . . practice . . . which operates as a fraud or deceit," (emphasis added) focuses not on the intent of the investment adviser, but rather on the effect of a particular practice. Again, by contrast, the Court in Hochfelder found that the language of § 10(b) -- particularly the terms "manipulative," "device," and "contrivance" -- clearly refers to "knowing or intentional misconduct." Finally, insofar as Capital Gains involved a statutory provision regulating the special fiduciary relationship between an investment adviser and his client, the Court there was dealing with a situation in which intent to defraud would not have been required even in a common law action for money damages. [Footnote 12]

Page 446 U. S. 695

Section 10(b), unlike the provision at issue in Capital Gains, applies with equal force to both fiduciary and nonfiduciary transactions in securities. It is our view, in sum, that the controlling precedent here is not Capital Gains, but rather Hochfelder. Accordingly, we conclude that scienter is a necessary element of a violation of § 10(b) and Rule 10b-5.

B

In determining whether proof of scienter is a necessary element of a violation of § 17(a), there is less precedential authority in this Court to guide us. But the controlling principles are well settled. Though cognizant that

"Congress intended securities legislation enacted for the purpose of avoiding frauds to be construed 'not technically and restrictively, but flexibly to effectuate its remedial purposes,'"

Affiliated Ute Citizens v. United States, 406 U.S. at 406 U. S. 151, quoting, SEC v. Capital Gains Research Bureau, 375 U.S. at 375 U. S. 195, the Court has also noted that "generalized references to the remedial purposes'" of the securities laws "will not justify reading a provision `more broadly than its language and the statutory scheme reasonably permit.'" Touche Ross Co. v. Redington,442 U. S. 560, 442 U. S. 578, quoting, SEC v. Sloan,436 U. S. 103, 436 U. S. 116. Thus, if the language of a provision of the securities laws is sufficiently clear in its context and not at odds with the legislative history, it is unnecessary "to examine the additional considerations of `policy' . . . that may have influenced the lawmakers in their formulation of the statute." Ernst & Ernst v. Hochfelder, 425 U.S. at 425 U. S. 214, n. 33.

The language of § 17(a) strongly suggests that Congress contemplated a scienter requirement under § 17(a)(1), but

Page 446 U. S. 696

not under § 17(a)(2) or § 17(a)(3). The language of § 17(a)(1), which makes it unlawful "to employ any device, scheme, or artifice to defraud," plainly evinces an intent on the part of Congress to proscribe only knowing or intentional misconduct. Even if it be assumed that the term "defraud" is ambiguous, given its varied meanings at law and in equity, the terms "device," "scheme," and "artifice" all connote knowing or intentional practices. [Footnote 13] Indeed, the term "device," which also appears in § 10(b), figured prominently in the Court's conclusion in Hochfelder that the plain meaning of § 10(b) embraces a scienter requirement. [Footnote 14] Id. at 425 U. S. 199.

By contrast, the language of § 17(a)(2), which prohibits any person from obtaining money or property "by means of any untrue statement of a material fact or any omission to state a material fact," is devoid of any suggestion whatsoever of a scienter requirement. As a well known commentator has noted, "[t]here is nothing on the face of Clause (2) itself which smacks of scienter or intent to defraud." 3 L. Loss, Securities Regulation 1442 (2d ed.1961). In fact, this Court in Hochfelder pointed out that the similar language of Rule 10b-5(b)

"could be read as proscribing . . . any type of material misstatement or omission . . . that has the effect of defrauding investors, whether the wrongdoing was intentional or not."

425 U.S. at 425 U. S. 212.

Finally, the language of § 17(a)(3), under which it is

Page 446 U. S. 697

unlawful for any person "to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit," (emphasis added) quite plainly focuses upon the effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible. This reading follows directly from Capital Gains, which attributed to a similarly worded provision in § 206(2) of the Investment Advisers Act of 1940 a meaning that does not require a "showing [of] deliberate dishonesty as a condition precedent to protecting investors." 375 U.S. at 375 U. S. 200.

It is our view, in sum, that the language of § 17(a) requires scienter under § 17(a)(1), but not under § 17(a)(2) or § 17(a)(3). Although the parties have urged the Court to adopt a uniform culpability requirement for the three subparagraphs of § 17(a), the language of the section is simply not amenable to such an interpretation. This is not the first time that this Court has had occasion to emphasize the distinctions among the three subparagraphs of § 17(a). In United States v. Naftalin,441 U. S. 768, 441 U. S. 774, the Court noted that each subparagraph of § 17(a)

"proscribes a distinct category of misconduct. Each succeeding prohibition is meant to cover additional kinds of illegalities -- not to narrow the reach of the prior sections."

(Footnote omitted.) Indeed, since Congress drafted § 17(a) in such a manner as to compel the conclusion that scienter is required under one subparagraph but not under the other two, it would take a very clear expression in the legislative history of congressional intent to the contrary to justify the conclusion that the statute does not mean what it so plainly seems to say.

We find no such expression of congressional intent in the legislative history. The provisions ultimately enacted as § 17(a) had their genesis in § 13 of identical bills introduced simultaneously in the House and Senate in 1933. H.R. 4314, 73d Cong., 1st Sess. (Mar. 29, 1933); S. 875, 73d Cong., 1st

Page 446 U. S. 698

Sess. (Mar. 29, 1933). [Footnote 15] As originally drafted, § 13 would have made it unlawful for any person

"willfully to employ any device, scheme, or artifice to defraud or to obtain money or property by means of any false pretense, representation, or promise, or to engage in any transaction, practice, or course of business . . . which operates or would operate as a fraud upon the purchaser."

Hearings on these bills were conducted by both the House Interstate and Foreign Commerce Committee and the Senate Banking and Currency Committee.

The House and Senate Committees reported out different versions of § 13. The Senate Committee expanded its ambit by including protection against the intentionally fraudulent practices of a "dummy," a person holding legal or nominal title but under a moral or legal obligation to act for someone else. As amended by the Senate Committee, § 13 made it unlawful for any person

"willfully to employ any device, scheme, or artifice or to employ any 'dummy,' or to act as any such 'dummy,' with the intent to defraud or to obtain money or property by means of any false pretense, representation, or promise, or to engage in any transaction, practice, or course of business . . . which operates or would operate as a fraud upon the purchaser. . . ."

See S. 875, 73d Cong., 1st Sess. (Apr. 27, 1933); S.Rep. No. 47, 73d Cong., 1st Sess., 4-5 (1933). The House Committee retained the original version of § 13, except that the word "willfully" was deleted from the beginning of the provision. [Footnote 16] See H.R. 5480, 73d Cong., 1st Sess., § 16(a) (May 4,

Page 446 U. S. 699

1933). It also rejected a suggestion that the first clause, "to employ any device, scheme, or artifice," be modified by the phrase, "with intent to defraud." See ibid.; Federal Securities Act: Hearings on H.R. 4314 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess., 146 (1933). The House and Senate each adopted the version of the provision as reported out by its Committee. The Conference Committee then adopted the House version with a minor modification not relevant here, see H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess., 12, 27 (1933), and it as later enacted into law as § 17(a) of the 1933 Act.

The Commission argues that the deliberate elimination of the language of intent reveals that Congress considered and rejected a scienter requirement under all three clauses of § 17(a). This argument, however, rests entirely on inference, for the Conference Report sheds no light on what the Conference Committee meant to do about the question of scienter under § 17(a). [Footnote 17] The legislative history thus gives rise to the equally plausible inference that the Conference Committee concluded that (1) in light of the plain meaning of § 17(a)(1), the language of intent -- "willfully" and "with intent to defraud" -- was simply redundant, and (2) with regard to § 17(a)(2) and § 17(a)(3), a "willful[ness]" requirement was not to be included. It seems clear, therefore, that the

Page 446 U. S. 700

legislative history, albeit ambiguous, may be read in a manner entirely consistent with the plain meaning of § 17(a). [Footnote 18] In the absence of a conflict between reasonably plain meaning and legislative history, the words of the statute must prevail. [Footnote 19]

C

There remains to be determined whether the provisions authorizing injunctive relief, § 20(b) of the 1933 Act and § 21(d) of the 1034 Act, modify the substantive provisions at issue in this case so far as scienter is concerned.

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. 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 or regulations promulgated thereunder, and that, "upon a proper showing," a district court shall grant the injunction. The elements of "a proper showing" thus include, at a minimum, proof that a person is engaged in or is about

Page 446 U. S. 701

to engage in a substantive violation of either one of the Acts or of the regulations promulgated thereunder. Accordingly, when scienter is an element of the substantive violation sought to be enjoined, it must be proved before an injunction may issue. But with respect to those provisions such as § 17(a)(2) and § 17(a)(3), which may be violated even in the absence of scienter, nothing on the face of § 20(b) or § 21(d) purports to impose an independent requirement of scienter. And there is nothing in the legislative history of either provision to suggest a contrary legislative intent.

This is not to say, however, that scienter has no bearing at all on whether a district court should enjoin a person violating or about to violate § 17(a)(2) or § 17(a)(3). In cases where the Commission is seeking to enjoin a person "about to engage in any acts or practices which . . . will constitute" a violation of those provisions, the Commission must establish a sufficient evidentiary predicate to show that such future violation may occur. See SEC v. Commonwealth Chemical Securities, Inc., 574 F.2d 90, 98-100 (CA2 1978) (Friendly, J.); 3 L. Loss, Securities Regulation, at 1976. An important factor in this regard is the degree of intentional wrongdoing evident in a defendant's past conduct. See SEC v. Wills, 472 F.Supp. 1250, 1273-1275 (DC 1978). Moreover, as the Commission recognizes, a district court may consider scienter or lack of it as one of the aggravating or mitigating factors to be taken into account in exercising its equitable discretion in deciding whether or not to grant injunctive relief. And the proper exercise of equitable discretion is necessary to ensure a "nice adjustment and reconciliation between the public interest and private needs." Hecht Co. v. Bowles,321 U. S. 321, 321 U. S. 329.

III

For the reasons stated in this opinion, we hold that the Commission is required to establish scienter as an element of a civil enforcement action to enjoin violations of § 17(a)(1) of the 1933 Act, § 10(b) of the 1934 Act, and Rule 10b-5

Page 446 U. S. 702

promulgated under that section of the 1934 Act. We further hold that the Commission need not establish scienter as an element of an action to enjoin violations of § 17(a)(2) and § 17(a)(3) of the 1933 Act. The Court of Appeals affirmed the issuance of the injunction in this case in the misapprehension that it was not necessary to find scienter in order to support an injunction under any of the provisions in question. Accordingly, the judgment of the Court of Appeals is vacated, and the case is remanded to that court for further proceedings consistent with this opinion.

It is so ordered.

[Footnote 1]

The Commission also charged the petitioner and three other defendants with violations of the registration provisions of §§ 5(a), (c) of the 1933 Act, 15 U.S.C. §§ 77e(a), (c). The District Court found that the petitioner had violated these provisions, and enjoined him from future violations. The Court of Appeals affirmed this holding, and the petitioner has not challenged this portion of the Court of Appeals' decision.

[Footnote 2]

The opinion of the District Court is reported in CCH Fed.Sec.L.Rep.

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