Securities and Exchange Commission v. Pros International, Inc., David M. Lamoreaux, Richard C. Landerman, Jack M. Johnston, George Craig Stayner ( 1993 )

PAUL KELLY, Jr., Circuit Judge.

Plaintiff-appellant Securities and Exchange Commission (SEC) appeals from the district court’s order granting summary judgment in favor of defendant-appellee George Stayner and denying a permanent injunction against Mr. Stayner. Our jurisdiction arises under 28 U.S.C. §§ 1291 & 1292(a) and we affirm.

Background

Mr. Stayner, a certified public accountant, prepared a materially false and misleading audit report expressing an unqualified opinion on the financial statements of defendant Pros International. The financial statements grossly overstated the value of Pros’ assets, giving a materially misleading description of Pros’ financial condition. The audit report indicates that Mr. Stayner had prepared the report in accordance with generally accepted auditing standards when, in fact, Mr. Stayner performed no independent verification of assets and failed to discover management’s misrepresentations.

The SEC named Mr. Stayner as a defendant in its securities enforcement action against Pros International and several other individual defendants who are not parties to this appeal. The suit alleged violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240 10b-5, and § 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and sought a permanent injunction against future violations of the securities laws by Mr. Stay-ner.

Mr. Stayner concedes that he negligently violated provisions of the federal securities laws. The district court granted Mr. Stay-ner’s motion for summary judgment and denied the Commission’s motion. The court found that Mr. Stayner violated § 17(a)(2) & (3) through negligence, but lacked scienter, which is a prerequisite for a violation of § 10(b), § 17(a)(1) or Rule 10b-5. The motion for a permanent injunction was denied.

Discussion

We review the grant of summary judgment de novo, construing all evidence and drawing any inferences in a light most favorable to the party opposing summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-52, 106 S.Ct. 2505, 2510-12, 91 L.Ed.2d 202 (1986); Fed.R.Civ.P. 56(c). However, once we determine that the issue is ripe for summary disposition, we review the district court’s grant or denial of a permanent injunction for abuse of discretion. United States v. W.T. Grant, Co., 345 U.S. 629, 635-36, 73 S.Ct. 894, 898-99, 97 L.Ed. 1303 (1953); SEC v. Bonastia, 614 F.2d 908, 913 (3rd Cir.1980).

An injunction based on the violation of securities laws is appropriate if the SEC demonstrates a reasonable and substantial likelihood that the defendant, if not enjoined, ■will violate securities laws in the future. See Securities Act § 20(b), 15 U.S.C. § 77t(b); Exchange Act § 21(d), 15 U.S.C. § 78u(d); Bonastia, 614 F.2d at 912. Determination of the likelihood of future violations requires analysis of several factors, such as the seriousness of the violation, the degree of scienter, whether defendant’s occupation will present opportunities for future violations and whether defendant has recognized his wrongful conduct and gives sincere assurances against future violations. SEC v. Youmans, 729 F.2d 413, 415 (6th Cir.) cert. denied, 469 U.S. 1034, 105 S.Ct. 507, 83 L.Ed.2d 398 (1984); SEC v. Blatt, 583 F.2d 1325, 1334 n. 29 (5th Cir.1978). Although no single factor is determinative, we have previously held that the degree of scienter “bears heavily” on the decision. SEC v. Haswell, 654 F.2d 698, 699 (10th Cir.1981). A knowing violation of §§ 10(b) or 17(a)(1) will justify an injunction more readily than a negligent violation of § 17(a)(2) or (3). However, if there is a sufficient showing that the violation is likely to recur, an injunction may be justified even for a negligent violation of § 17(a)(2) or (3). Aaron v. SEC, 446 U.S. 680, 700-01, 100 S.Ct. 1945, 1957-58, 64 L.Ed.2d 611 (1980).

Applying these factors, the district court’s denial of the injunction did not constitute an abuse of discretion. Mr. Stayner was not a knowing participant in a fraudulent scheme. Although his actions were clearly negligent, and probably reckless, there has been no showing that Mr. Stayner intended to defraud investors. See Haswell, 654 F.2d at 700. The SEC and the dissent remind us that Mr. Stayner violated several basic auditing standards promulgated by the AICPA,¹ including the general standard requiring independence and the field work standard requiring that the auditor gather evidence to support an opinion on the financial statements. See SAS No. 1, AU § 150.02. This alone is insufficient to warrant an injunction, because we are required to look beyond alleged violations of professional standards and determine “whether there is a reasonable likelihood that the defendant, if not enjoined, will again engage in the illegal conduct.” See Bonastia, 614 F.2d at 912. The mere fact that the Defendant will remain an accountant is insufficient for an injunction. The SEC’s authority does not extend to general regulation of the accounting profession and where, as here, there is no evidence that future violations are likely, we will not second guess the district court.²

A permanent injunction can have severe economic and professional consequences for an accountant. See SEC v. Thermodynamics, Inc., 464 F.2d 457 (10th Cir.1972) cert. denied, 410 U.S. 927, 93 S.Ct. 1358, 35 L.Ed.2d 588 (1973). Mr. Stayner’s violation was isolated. He is a sole practitioner whose practice is limited primarily to preparing income tax returns. His errors in the audit report resulted from gross negligence and inexperience. He did not profit from the transaction, as he charged only a fraction of what a full audit should have cost, and never received payment. He has since discontinued preparing audit reports for public companies. There is no evidence that his current occupation is likely to present opportunities for future violations.

Mr. Stayner has also recognized the wrongful nature of his conduct, and assured the district court that this situation will not occur again. He supports his assurances by agreeing to limit his practice to tax return work.

Based on the foregoing, we find that no genuine issue of material fact exists and that the district court did not abuse its discretion in determining that Mr. Stayner is unlikely to violate the securities laws in the future.

AFFIRMED.

1 . American Institute of Certified Public Accountants.

2 . We recognize that Mr. Stayner engaged in auditing and accounting work for other companies connected with David Lamoreaux, and that the SEC suspended trading on two of the companies two years after Mr. Stayner’s involvement. However, the SEC fails to allege or document any wrongdoing by Mr. Stayner in connection with those companies. Therefore, Mr. Stayner’s work for Pros remains the single incident of wrongdoing. We are presented with no pattern or practice of wrongdoing, nor evidence of recent or potential future work for public companies.