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

MR. CHIEF JUSTICE BURGER, concurring.

I join the opinion of the Court and write separately to make three points:

(1) No matter what mental state § 10(b) and § 17(a) were to require, it is clear that the District Court was correct here in entering an injunction against petitioner. Petitioner 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 neither discharged the salesmen nor rebuked them; he did nothing whatever to indicate that such salesmanship was unethical, illegal, and should stop. Hence, the District Court’s findings (a) that petitioner "intentionally failed" to terminate the fraud and(b) that his conduct was reasonably likely to repeat itself find abundant support in the record. In my view, the Court of Appeals could well have affirmed on that ground alone.

(2) I agree that § 10(b) and § 17(a)(1) require scienter but that § 17(a)(2) and § 17(a)(3) do not. I recognize, of course, that this holding "drives a wedge between [sellers and buyers] and says that henceforth only the seller’s negligent misrepresentations may be enjoined." Post at 715 (BLACKMUN, J., dissenting). But it is not this Court that "drives a wedge"; Congress has done that. The Court’s holding is compelled in large measure by Ernst Ernst v. Hochfelder, 425 U.S. 185 (1976), and gives effect to congressional intent as manifested in the language of the statutes and in their histories. If, as intimated, the result is "bad" public policy, that is the concern of Congress, where changes can be made.

(3) It bears mention that this dispute, though pressed vigorously by both sides, may be much ado about nothing. This is so because of the requirement in injunctive proceedings of a showing that "there is a reasonable likelihood that the wrong will be repeated." SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (CA2 1975). Accord, SEC v. Keller Corp., 323 F.2d 397, 402 (CA7 1963). To make such a showing, 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. Because the Commission must show some likelihood of a future violation, defendants whose past actions have been in good faith are not likely to be enjoined. See opinion of the Court, ante at 701. That is as it should be. An injunction is a drastic remedy, not a mild prophylactic, and should not be obtained against one acting in good faith.

1. The word "willfully" was originally included in the draft of what was to become § 17(a) of the 1933 Act, and both Houses of Congress considered the addition of the phrase "with intent to defraud" to the language of that provision. That phrase ultimately was inserted by the Senate, but the bill that emerged from conference lacked either of the references to a state-of-mind requirement. See H.R. 4314, § 13, 73d Cong., 1st Sess. (Mar. 29, 1933); S. 875, § 13, 73d Cong., 1st Sess. (Apr. 27, 1933); H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess., 12, 26-27 (1933). The House bill, which, as reported, did not contain the words "willfully" and "intent to defraud," see H.R. 5480, § 16(a), 73d Cong., 1st Sess. (May 4, 1933), was used by the conferees as their working draft. See Landis, The Legislative History of the Securities Act of 1933, 28 Geo.Wash.L.Rev. 29, 45 (1959).

The Court suggests that no meaning should be attributed to these events, because Congress never explained its reasons for deleting this explicit state-of-mind language. Ante at 699-700. But the Conference Report, which discussed differences between the House bill and the Conference substitute, noted that the conferees had adopted from the Senate bill several "minor and clarifying changes" that were intended "to make clear and effective the administrative procedure provided for and to remove uncertainties" concerning the powers of the Commission. H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess., 24 (1933). If the Court were correct in its interpretation of § 17(a)(1), retention of the Senate’s explicit state-of-mind language undoubtedly would have added clarity to congressional intent. In light of the other changes to which the House acceded, it is thus difficult, on the Court’s theory, to understand why this change would not have been adopted as well. Moreover, Congress was well aware of the significance that addition or deletion of these terms would have. See 77 Cong.Rec. 2994 (1933) (colloquy between Sens. Fess and Fletcher); id. at 2919 (remarks of Rep. Rayburn). It is also noteworthy that, when the 1934 Act was under consideration, a proposal was placed before Congress to amend § 17(a) to limit it to conduct that was undertaken "willfully and with intent to deceive." 78 Cong.Rec. 8703 (1934). The proposal was voted down. Id. at 8708.

2. I perceive no reason why the misrepresentations concerning Lawn-A-Mat Chemical & Equipment Corp. spread by petitioner’s brokerage house would not qualify as a "device . . . to defraud," within the meaning of § 17(a)(1), or as a "deceptive device" in contravention of Rule 10b-5, within the meaning of § 10(b). I do not regard the word "deceptive," which focuses more on effect than on purpose, as adding significant connotations of scienter to the word "device." In light of the Court’s disposition of this case, I shall not consider whether the misrepresentations might be reached under § 17(a)(2) or § 17(a)(3) as well, or whether the facts of the case establish scienter, as the District Court found.

3. See, e.g., Federal Securities Act, Hearings on H.R. 4314 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess., 11, 95, 109, 112 (1933); Securities Act: Hearings on S. 875 before the Senate Committee on Banking and Currency, 73d Cong., 1st Sess., 71, 146-147, 156, 170, 245-246, 253 (1933); see also 78 Cong.Rec. 8096 (1934). For a general discussion of state precursors and their consideration by Congress, see 1 L. Loss, Securities Regulation 33-34, 35-43 (2d ed.1961).

4. Nor is there any danger that actions for prophylactic relief brought by the Commission will result in the "`broadening of the class of plaintiff who may sue in this area of the law,’" that has been an animating concern of the Court’s decisions limiting the scope of private damages actions under § 10(b). Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214, n. 33 (1976), quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 747-748 (1975). Compare Ultramares Corp. v. Touche, 255 N.Y. 170, 179-180, 174 N.E. 441, 444 (1931), with People v. Federated Radio Corp., 244 N.Y. 33, 154 N.E. 655 (1926).

5. The prohibition in § 5 of the 1933 Act, 15 U.S.C. § 77e, against selling securities without an effective registration statement has been interpreted to require no showing of scienter.See, e.g., SEC v. Spectrum, Ltd., 489 F.2d 535, 541-542 (CA2 1973); SEC v. North American Research & Development Corp., 424 F.2d 63, 73-74 (CA2 1970). See also § 8(b), 15 U.S.C. § 77h(b) (power to withhold registration effectiveness); § 8(d), 15 U.S.C. § 77h(d) (power to issue "stop order" suspending registration effectiveness). The 1934 Act incorporated the culpability requirements for Commission remedies that the 1933 Act had established, although it did set a scienter standard for SEC remedies of criminal prosecution and administrative revocation of broker-dealer registrations. See Securities Exchange Act of 1934, Tit. II, § 210, 48 Stat. 908-909.

6. For cases involving § 10(b), see, e.g., SEC v. World Radio Mission, 544 F.2d 535, 541, n. 10 (CA1 1976); SEC v. Management Dynamics, Inc., 515 F.2d 801, 809 (CA2 1975); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1096 (CA2 1972); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 863 (CA2 1968), cert. denied sub nom. Coates v. SEC, 394 U.S. 976 (1969); SEC v. Dolnick, 501 F.2d 1279, 1284 (CA7 1974); SEC v. Geyser Minerals Corp., 452 F.2d 876, 880-881 (CA10 1971). For cases involving § 17(a), see, e.g., SEC v. World Radio Mission, supra; SEC v. Coven, 581 F.2d 1020, 1026 (CA2 1978), cert. denied, 440 U.S. 950 (1979); SEC v. American Realty Trust, 586 F.2d 1001, 1006-1007 (CA4 1978); SEC v. Van Horn, 371 F.2d 181, 185-186 (CA7 1966); SEC v. Geyser Minerals Corp., supra. Because several of the latter cases turn on interpretations of § 17(a)(2) or § 17(a)(3), they do not necessarily conflict in result with today’s decision.

7. When questioned about civil liability, the drafters of the 1933 Act strongly defended the theory that it would be preferable to place liability for negligent misstatements on the shoulders of those responsible for their dissemination, rather than to require innocent investors to suffer in silence. Judge Alexander Holtzoff, then Special Assistant to the Attorney General of the United States, put it this way:

Criminal liability is based only on knowingly making a false statement. But civil liability exists even in the case of an innocent mistake. Let us assume that an innocent mistake is made and an investor loses money because of it. Now, who should suffer? The man who loses the money or the man who puts the mistake in circulation knowing that other people will rely upon that mistaken statement?

Securities Act, Hearings on S. 875 before the Senate Committee on Banking and Currency, 73d Cong., 1st Sess., 207 (1933). See also Federal Securities Act, Hearings on H.R. 4314 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess., 124-125 (1933) (testimony of Ollie M. Butler, Foreign Service Division, Department of Commerce).

8. In recognition of the importance to the investing public of the Commission’s authority to prevent negligent misstatements, the proposed Federal Securities Code drafted by the American Law Institute provides the Commission with power to obtain injunctions preventing deception and misrepresentation without proof of scienter. ALI, Federal Securities Code §§ 262(d), 297(a), 1602(a), 1819(a)(3), 1819(a)(4) (Prop.Off.Draft 1978). The ALI Code has been approved by the American Bar Association, 65 A.B.A.J. 341 (1979).

9. In 1975, Congress undertook relatively substantial revision of the securities laws. Securities Acts Amendments of 1975, Pub.L. 94-29, 89 Stat. 97; see Securities Acts Amendments of 1975: Hearings on S. 249 before the Subcommittee on Securities of the Senate Committee on Banking, Housing, and Urban Affairs, 94th Cong., 1st Sess., 1 (1975). In the course of its deliberations, Congress had occasion to consider the scope of Commission injunctive remedies. In reliance on the different purposes of Commission enforcement proceedings and private actions, Congress enacted § 21 (g) of the Act, 15 U.S.C. § 78u(g), which provides that, absent consent from the Commission, private actions may not be consolidated with Commission proceedings. The Senate Committee in charge of the legislation observed that Commission enforcement actions and private suits for damages, though both civil in nature, "are very different," and it explained that private suits involve complications that are not present when the Commission seeks injunctive relief:

Private actions frequently will involve more parties and more issues than the Commission’s enforcement action, thus greatly increasing the need for extensive pretrial discovery. In particular, issues related to . . . scienter, causation, and the extent of damages, are elements not required to be demonstrated in a Commission injunctive action.

S.Rep. No. 9475, p. 76 (1975) (emphasis in original).

In 1977, following the decision in Ernst & Ernst v. Hochfelder, Congress reexamined the Commission’s enforcement authority, this time in connection with the Foreign Corrupt Practices Act of 1977, Pub.L. 95213, 91 Stat. 1494. Case law was discussed in some detail, and express approval was given to judicial decisions holding that scienter was not required when the SEC sought injunctive relief under Rule 10b-5. The responsible Committee in the House of Representatives declared:

In the context of an SEC action to enjoin future violations of the securities laws, a defendant’s state of mind should make no difference. The harm to the public is the same regardless of whether or not the violative conduct involved scienter. Because an SEC enforcement action is designed to protect the public against the recurrence of violative conduct, and not to punish a state of mind, this Committee intends that scienter is not an element of any Commission enforcement proceeding.

H.R.Rep. No. 95-640, p. 10 (1977). As expressions of later Congresses, these statements, of course, do not control the meaning of provisions enacted in 1933 and 1934. Yet the views of a subsequent Congress are entitled to some weight, particularly when that Congress undertakes significant revision of the statute but leaves the disputed provision intact. Cf., e.g., Andrus v. Allard, 444 U.S. 51, 59, n. 10 (1979); United States v. Rutherford, 442 U.S. 544, 553-554 (1979); Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 248 (1978); NLRB v. Bell Aerospace Co., 416 U.S. 267, 274-275 (1974).