The Supreme Court has agreed to decide whether the Securities and Exchange Commission must have proof of guilty knowledge when it seeks an injunction under antifraud provisions of the securities laws.
The case arose from a 1976 complaint filed by the SEC in U.S. District Court in New York in connection with the offer and sale of common stock of Lawn-A-Mat Chemical & Equipment Corp.
The complaint alleged that Peter E. Aaron, son of the owner of the Manhattan broker-dealer firm of E. L. Aaron & Co., had managerial responsibility for firm employes who were offering and selling Lawn-A-Mat stock. He knew, or should have known, that they were making false and misleading representations, but failed to try to halt the fraudulent activity, the complaint alleged.
A federal judge enjoined Aaron from future violations and was affirmed by a 2d U.S. Circuit Court of Appeals decision rejecting his contention that guilty knowledge, or scienter, was a necessary but missing component of the SEC's complaint.
Notably, Aaron's petition for Supreme Court review was supported by the SEC. In a brief for the commission, Solicitor General Wade H. mcCree Jr. said the 2d Circuit had been correct, that the harm caused by a defendant's deceptive conduct in securities transactions doesn't depend on his state of mind, and that a requirement that the SEC prove scienter in every antifraud case would significantly erode its ability to enforce the securities laws.