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.
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
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 § 20 (b) of the 1933 Act and § 21 (d) of the 1934 Act, the Commission alleged that the petitioner had violated and aided and abetted
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.
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 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."
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
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:
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
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:
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"
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 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, 730; Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-154; Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 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 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.
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
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 197-199. This meaning, in fact, was thought to be so unambiguous as to suggest that "further inquiry may be unnecessary." Id., at 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 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 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).
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).
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. 180.
The issue in Capital Gains was whether in an action for injunctive relief for violations of § 206 (2)
The Court added that its conclusion was "not in derogation of the common law of fraud." Id., at 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 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 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 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
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 151, quoting, SEC v. Capital Gains Research Bureau, 375 U. S., at 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, 578, quoting, SEC v. Sloan, 436 U.S. 103, 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 214, n. 33.
The language of § 17 (a) strongly suggests that Congress contemplated a scienter requirement under § 17 (a) (1), but
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 212.
Finally, the language of § 17 (a) (3), under which it is
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, 774, the Court noted that each sub-paragraph 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
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
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.
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).
There remains to be determined whether the provisions authorizing injunctive relief, § 20 (b) of the 1933 Act and § 21 (d) of the 1934 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
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, 329.
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
It is so ordered.
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
(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.
MR. JUSTICE BLACKMUN, with whom MR. JUSTICE BRENNAN and MR. JUSTICE MARSHALL join, concurring in part and dissenting in part.
I concur in the Court's judgment that §§ 17 (a) (2) and (3) of the Securities Act of 1933, 15 U. S. C. §§ 77q (a) (2) and (3), do not require a showing of scienter for purposes of an action for injunctive relief brought by the Securities and Exchange Commission. I dissent from the remainder of the Court's reasoning and judgment. I am of the view that neither § 17 (a) (1) of the 1933 Act, 15 U. S. C. § 77q (a) (1), nor § 10 (b) of the Securities Exchange Act of 1934, 15 U. S. C. § 78j (b), as elaborated by SEC Rule 10b-5, 17 CFR § 240.10b-5 (1979), requires the Commission to prove scienter
The issues before the Court in this case are important and critical. Sections 17 (a) and 10 (b) are the primary antifraud provisions of the federal securities laws. They are the chief means through which the Commission, by exercise of its authority to bring actions for injunctive relief, can seek protection against deception in the marketplace. See § 20 (b) of the 1933 Act, 15 U. S. C. § 77t (b); § 21 (d) of the 1934 Act, 15 U. S. C. § 78u (d). As a result, they are key weapons in the statutory arsenal for securing market integrity and investor confidence. See Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L. J. 171, 182 (1933); Note, 57 Yale L. J. 1023 (1948). If the Commission is denied the ability effectively to nip in the bud the misrepresentations and deceptions that its investigations have revealed, honest investors will be the ones who suffer. Often they may find themselves stripped of their investments through reliance on information that the Commission knew was misleading but lacked the power to stop or contain.
Today's decision requires the Commission to prove scienter in many, if not most, situations before it is able to obtain an injunction. This holding unnecessarily undercuts the Commission's authority to police the marketplace. As I read the Court's opinion, it is little more than an extrapolation of the reasoning that was employed in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), in imposing a scienter requirement upon private actions for damages implied under § 10 (b) and Rule 10b-5. Whatever the authority of Hochfelder may be in its own context, I perceive little reason to regard it as governing precedent here. I believe that there are sound reasons for distinguishing between private damages actions and public enforcement actions under these statutes, and for applying a scienter standard, if one must be applied anywhere, only in the former class of cases.
In keeping with the reasoning of Hochfelder, the Court places much emphasis upon statutory language and its assertedly plain meaning. The words "device, scheme, or artifice to defraud" in § 17 (a) (1), and the words "manipulative or deceptive device or contrivance" in § 10 (b), are said to connote "knowing or intentional misconduct." Ante, at 690, 696. And this connotation, it is said, implicitly incorporates the requirement of scienter traditionally applicable in the common law of fraud. But there are at least two specific responses to this wooden analysis. First, it is quite unclear that the words themselves call for so restrictive a definition. Second, as the Court recognized in SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), the common-law requirement of scienter generally observed in actions for fraud at law was often dispensed with in actions brought before chancery.
The words of a statute, particularly one with a remedial object, have a "`meaning imparted to them by the mischief to be remedied.'" St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 545 (1978), quoting Duparquet Co. v. Evans, 297 U.S. 216, 221 (1936). Thus, antifraud provisions of securities legislation are to be construed "not technically and restrictively, but flexibly to effectuate [their] remedial purposes." SEC v. Capital Gains Research Bureau, 375 U. S., at 195; Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971); Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972). See also SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 350-351 (1943); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849-851 (1975). I have no doubt that the "mischief" confronting Congress in 1933 and 1934 included a large measure of intentional deceit and misrepresentation. The concern, however, ran deeper still, and Congress sought to develop a regulatory
Reading the language of § 17 (a) (1) and § 10 (b) with these purposes in mind, I am not at all certain—although the Court professes to be—that the language is incapable of being read to include misrepresentations that result from something less than willful behavior. The word "willfully," that Congress employed elsewhere in the securities laws when it wanted to specify a prerequisite of knowledge or intent, is conspicuously missing.
For example, the word "device" that is common to both statutes may have a far broader scope than the Court suggests. The legislative history of the 1934 Act used that term as a synonym for "practice," a word without any strong connotation of scienter, and it expressed a desire to confer upon the Commission authority under § 10 (b) to prohibit "any . . . manipulative or deceptive practices . . . detrimental to the interests of the investor." S Rep. No. 792, 73d Cong., 2d Sess., 18 (1934). The term "device" also was used in § 15
In my view, this evidence provides a stronger indication of congressional understanding of the term "device" than the dictionary definition on which the Court relies. Ante, at 696, n. 13; cf. Ernst & Ernst v. Hochfelder, 425 U. S., at 199, n. 20.
An additional and independent ground for disagreement with the Court's analysis is its utter failure to harmonize statutory construction with prevailing equity practice at the time the securities laws were enacted. On prior occasions, the Court has emphasized the relevance of common-law principles in the interpretation of the antifraud provisions of the securities laws. See, e. g., Chiarella v. United States, 445 U.S. 222, 227-229 (1980). See also Lanza v. Drexel & Co., 479 F.2d 1277, 1289-1291 (CA2 1973) (en banc). Yet in this case, the Court oddly finds those principles inapplicable. It specifically casts aside the fact that proof of scienter was not required in actions seeking equitable relief against fraudulent practices. This position stands in stark contrast with the Court's clear recognition of this separate equity tradition in SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).
In Capital Gains, the Court was called upon to construe § 206 (2) of the Investment Advisers Act of 1940, 54 Stat. 847, as amended, 15 U. S. C. § 80b-6 (2). The statute is a general antifraud provision framed in language similar to that of § 17 (a) (3) of the 1933 Act. The Court of Appeals, sitting en banc, had decided by a close vote that the Commission could not obtain an injunction for violation of the statute unless it proved scienter. See SEC v. Capital Gains Research Bureau, 306 F.2d 606 (CA2 1962). This Court, rejecting the view of the lower court that scienter was required in all cases involving fraud, reversed. It said:
The Court does not now dispute the veracity of what it said in Capital Gains. Indeed, the different standards for fraud in law and at equity have been noted by commentators for more than a century. See, e. g., 1 J. Story, Equity Jurisprudence §§ 186-187 (6th ed. 1853); G. Bower, The Law of Actionable Misrepresentation § 250 (1911); 2 J. Pomeroy, Equity Jurisprudence § 885 (4th ed. 1918); 3 S. Williston, The Law of Contracts § 1500 (1920); W. Walsh, Equity § 109, p. 509 (1930). See also Shulman, Civil Liability and the Securities Act, 43 Yale L. J. 227, 231 (1933). The difference originally may have been attributable more to historical accident than to any conscious policy. See Keeton, Actionable Misrepresentation: Legal Fault as a Requirement (Part I), 1 Okla. L. Rev. 21, 23 (1948). But as one commentator explained, it has survived because in equity "[i]t is not the cause but the fact, of injury, and the problem of its practical control through judicial action, which concern the court." 1 F. Lawrence, Substantive Law of Equity Jurisprudence § 13 (1929) (emphasis in original); see also id., § 17. As a consequence of this different focus, common-law courts consistently have held that in an action for rescission or other equitable relief the fact of material misrepresentation is sufficient, and the knowledge or purpose of the wrongdoer need not be shown.
The Court purports to distinguish Capital Gains on the grounds that it involved a different statutory provision with somewhat different language, and that it stressed the confidential duties of investment advisers to their clients. Ante, at 693-695. These observations, in my view, do not weaken the relevance of the history on which the Court in Capital Gains relied. In fact, that history may be even more pertinent here. This case involves actual dissemination of material
The significance of this common-law tradition, moreover, is buttressed by reference to state precursors of the federal securities laws. The problem of securities fraud was by no means new in 1933, and many States had attempted to deal with it by enactment of their own "blue-sky" statutes. When Congress turned to the problem, it explicitly drew from their experience. One variety of state statute, the so-called "fraud" laws of New York, New Jersey, Maryland, and Delaware, empowered the respective state attorneys general to bring actions for injunctive relief when fraudulent practices in the sale of securities were uncovered. See, e. g., Federal Securities Act, Hearings on H. R. 4314 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess., 95 (1933). Of these statutes, the most prominent was the Martin Act of New York, 1921 N. Y. Laws, ch. 649, N. Y. Gen. Bus. Law §§ 352-353 (Consol. 1921), which had been fairly actively enforced. The drafters of the federal securities laws referred to these specific statutes as models for the power to seek injunctive relief that they requested for federal enforcement authorities. The experience of the State of New York, in particular, was repeatedly called to Congress' attention as an example for federal legislation to follow.
This decision was in keeping with the general tenor of state laws governing equitable relief in the context of securities transactions. See Note, 40 Yale L. J. 987, 988 (1931).
The Court dismisses all this evidence with the observation, ante, at 700, n. 18, that the specific holdings of cases like Federated Radio were not explicitly placed before Congress. Yet these were not isolated holdings or novel twists of law. They were part of an established, longstanding equity tradition the significance of which the Court has chosen simply to ignore. I am convinced that Congress was aware of this tradition, see n. 3, supra, and that if it had intended to depart from it, it would have left more traces of that intention than the Court has been able to find. Cf. Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944) ("We are dealing here with the requirements of equity practice with a background of several hundred years of history").
Although I disagree with the Court's textual exegesis and its assessment of history, I believe its most serious error may be a failure to appreciate the structural interrelationship among equitable remedies in the 1933 and 1934 Acts, and to accord that interrelationship proper weight in determining the substantive reach of the Commission's enforcement powers under § 17 (a) and § 10 (b).
The structural considerations that were advanced in support of the decision to require proof of scienter in a private action for damages, see Ernst & Ernst v. Hochfelder, 425 U. S., at 206-211, have no application in the present context. In Hochfelder, the Court noted that Congress had placed significant limitations on the private causes of action for negligence that were available under provisions of the 1934 Act other than § 10 (b). Ibid. It concluded that the effectiveness of these companion statutes might be undermined if private plaintiffs sustaining losses from negligent behavior also could sue for damages under § 10 (b). Id., at 210. Obviously, no such danger is created by Commission-initiated actions for injunctive relief, and the Court admits as much. Ante, at 691, n. 9.
In fact, the consistent pattern in both the 1933 Act and the 1934 Act is to grant the Commission broad authority to seek enforcement without regard to scienter, unless criminal punishments are contemplated. In both Acts, state of mind is treated with some precision. Congress used terms such as
The Court's decision deviates from this statutory scheme. That deviation, of course, is only partial. After today's decision, it still will be possible for the Commission to obtain relief against some negligent misrepresentations under § 17 (a) of the 1933 Act. Yet this halfway-house approach itself highlights the error of the Court's decision. Rule 10b-5 was promulgated to fill a gap in federal securities legislation, and
Many lower courts have refused to go so far. Both before and after Hochfelder, they have rejected the contention that the Commission must prove scienter under either § 17 (a) or § 10 (b) before it can obtain injunctive relief against deceptive practices.
I thus arrive at the conclusion that statutory language does not compel the judgment reached by the Court, while considerations of history, statutory structure, legislative purpose, and policy all strongly favor an interpretation of § 17 (a) and § 10 (b) that permits the Commission to seek injunctive relief without first having to prove scienter. In my view, this conclusion is fortified by the fact that Congress has approved it in a related context.
"Whenever it shall appear to the Commission that any person has engaged, is engaged, or is about to engage in any act or practice constituting a violation of any provision of this subchapter, or of any rule, regulation, or order hereunder, . . . it may in its discretion bring an action in the proper district court of the United States . . . to enjoin such acts or practices and to enforce compliance with this subchapter or any rule, regulation, or order hereunder. Upon a showing that such person has engaged, is engaged, or is about to engage in any such act or practice, . . . a permanent or temporary injunction or decree or restraining order shall be granted without bond."
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 note-worthy 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.
"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).
"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. 94-75, p. 76 (1975) (emphasis in original).
In 1977, following the decision in Ernst & Ernst v. Hochfelder, Congress re-examined the Commission's enforcement authority, this time in connection with the Foreign Corrupt Practices Act of 1977, Pub. L. 95-213, 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).