Aaron v. SEC

Supreme Court of the United States · 1980 · Corporations

446 U.S. 680 (1980)

Updated August 22, 2026

CorporationsSecurities regulationSEC enforcementScienterSECinjunctionSecurities Act of 1933Securities Exchange Act of 1934

Facts

Aaron was a managerial employee of a registered broker-dealer and supervised sales representatives promoting Lawn-A-Mat stock. Two representatives repeatedly made false and misleading statements to investors, including false claims that Lawn-A-Mat planned to manufacture a small car and tractor and unfounded optimistic statements about the company's finances. An attorney for Lawn-A-Mat twice informed Aaron that the statements were false and misleading, and Aaron also had reason to know they were false from the firm's due diligence materials. Although he assured the attorney the misrepresentations would stop, Aaron took no affirmative steps to prevent the representatives he supervised from continuing their fraudulent sales practices.

Issue

In an SEC civil enforcement action seeking to enjoin violations of § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5, must the SEC prove scienter. More specifically, does the answer differ among § 17(a)(1), § 17(a)(2), § 17(a)(3), § 10(b), and Rule 10b-5?

Rule

Scienter is a necessary element of a violation of § 10(b), Rule 10b-5, and § 17(a)(1), regardless of whether the plaintiff is the SEC and regardless of whether the relief sought is an injunction. Scienter is not a necessary element of a violation of § 17(a)(2) or § 17(a)(3). The injunction provisions, § 20(b) of the 1933 Act and § 21(d) of the 1934 Act, do not independently alter the scienter requirements of the underlying substantive provisions.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Phoenix, Tara Nguyen, a vice president at Desert Crest Securities, approved a client memo about a mining company's reserves without checking the underlying reports. The memo overstated reserves, but the SEC can show only that Tara was careless, not that she intended to mislead anyone.

If the SEC seeks an injunction alleging violations of § 10(b) and Rule 10b-5 based solely on Tara's conduct, what is the strongest argument against liability on those claims?

Explanation. Scienter is a necessary 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. The Court reasoned that the statutory terms such as "manipulative," "device," and "contrivance" indicate knowing or intentional misconduct. The injunction provisions do not remove that element.