
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________          No. 94-1405                                ESTATE OF JAIME SOLER,                               Plaintiffs, Appellants,                                          v.                              JOAQUIN RODRIGUEZ, ET AL.,                                Defendants, Appellees.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF PUERTO RICO                    [Hon. Jose Antonio Fuste, U.S. District Judge]                                              ___________________                                 ____________________                                        Before                                Boudin, Circuit Judge,                                        _____________                           Campbell, Senior Circuit Judge,                                     ____________________                         and Boyle,1 Senior District Judge.                                      _____________________                                 ____________________               Pedro  A. Jimenez,  with  whom  Katarina  Stipec  Rubio  and               _________________               _______________________          Gonz lez  Oliver,  Correa  Calzada, Collazo  Salazar,  Herrero  &          _________________________________________________________________          Jim nez were on brief for appellants.          _______               Jorge  E.  P rez  D az,  with  whom  Jorge  I.  Peirats  and               ______________________               __________________          Pietrantoni Mendez &  Alvarez were on  brief for appellee  Centro          _____________________________          Medico Del Turabo, Inc.                Eli B. Arroyo  for appellee Universidad de  Ciencias Medicas               _____________          San Juan Bautista, Inc.                                 ____________________                                   August 15, 1995                                 ____________________                                        ____________________               1Of the District of Rhode Island, sitting by designation.                      CAMPBELL,   Senior   Circuit   Judge.     In   this                                  ________________________            shareholder's  derivative  suit brought  on behalf  of Centro            M dico del Turabo, Inc. ("CMT"), Plaintiffs-Appellants Ivette            Perez Vda. de Soler, Marie Ivette Soler Perez, Jaime A. Soler            Perez, and  Antonio Soler  Perez (as  representatives of  the            Estate of  Dr. Jaime  Soler, or the  "Soler Estate")  and Dr.            Jose A. Badillo appeal from the district  court's Opinion and            Order and Order on  Reconsideration dismissing their verified            complaint under Fed. R. Civ. P. 12(b)(6) for failure to state            a claim upon which relief may  be granted.1  Estate of  Soler                                                         ________________            ex rel. Soler  v. Rodriguez, 847 F. Supp.  236 (D.P.R. 1994).            _____________     _________                                            ____________________            1.  In  its Opinion and  Order and Order  on Reconsideration,            the district court said  it was dismissing the complaint  for            failure to state  a claim under Rule 12(b)(6),  but stated in            the judgment that  the complaint  was dismissed  for lack  of            subject matter jurisdiction.  Where both federal jurisdiction            and the  existence of a  federal claim turn upon  whether the            complaint states a federal question, the preferable  practice            is   to  assume  that  jurisdiction  exists  and  proceed  to            determine  whether  the   claim  passes  muster   under  Rule            12(b)(6).   See  Bell v.  Hood, 327  U.S. 678,  682-83 (1946)                        ___  ____     ____            (where the  merits of  the action  are  intertwined with  the            issue  of jurisdiction, the federal claim should be dismissed            for lack of subject matter  jurisdiction only if the claim is            immaterial  and  made  solely for  the  purpose  of obtaining            jurisdiction or if  the claim is clearly frivolous  or wholly            insubstantial); Arroyo-Torres v. Ponce Fed. Bank, F.B.S., 918                            _____________    _______________________            F.2d  276, 280 (1st  Cir. 1990) (since  plaintiff's assertion            that federal  law implied a  private right of action  was not            frivolous, the district court had subject matter jurisdiction            to determine whether or  not a claim existed; therefore,  the            dismissal  entered by the district court, ostensibly for lack            of  jurisdiction,   should  have  been  premised   upon  Rule            12(b)(6)); see also 2A James W. Moore et al., Moore's Federal                       ________                           _______________            Practice   12.07[2.-1] (2nd ed.  1993).  However, "we are not            ________            bound by the label employed below," Carr v. Learner, 547 F.2d                                                ____    _______            135, 137 (1st Cir. 1976), and will treat the dismissal as one            made pursuant to Rule 12(b)(6).                                         -2-                                          2            The district court  held that appellants failed to  plead the            "in connection with"  requirement of a cause  of action under            Section  10(b)2 and  Rule 10b-5,3 but  rather alleged  only a                                            ____________________            2.  Section 10(b) of the Securities Exchange  Act of 1934, 15            U.S.C.   78j(b), states:                      It  shall  be  unlawful  for any  person,                      directly or indirectly, by the use of any                      means  or  instrumentality  of interstate                      commerce  or  of  the mails,  or  of  any                      facility  of   any  national   securities                      exchange . . .                       (b)  To use or employ, in connection with                      the purchase  or  sale  of  any  security                      registered  on   a  national   securities                      exchange   or   any   security   not   so                      registered, 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.            3.  Rule 10b-5, 17 C.F.R.   240.10b-5 states:                      It shall  be  unlawful  for  any  person,                      directly or indirectly, by the use of any                      means  or  instrumentality  of interstate                      commerce,  or of  the  mails  or  of  any                      facility  of   any  national   securities                      exchange,                      (a) To  employ  any  device,  scheme,  or                      artifice to defraud,                      (b) To  make any  untrue  statement of  a                      material  fact  or  to  omit to  state  a                      material fact necessary  in order to make                      the statements made, in the light  of the                      circumstances under which they were made,                      not misleading, or                      (c) To  engage in  any act,  practice, or                      course  of  business  which  operates  or                      would operate as  a fraud or deceit  upon                      any person,                      in connection  with the purchase  or sale                      of any security.                                         -3-                                          3            case  of breach of fiduciary duty and corporate mismanagement            under Puerto Rico law.  We reverse.                                      I.  FACTS.                                          _____                      The  facts alleged  in  the complaint     extending            every reasonable inference in plaintiffs' favor, see Coyne v.                                                             ___ _____            City of Somerville, 972 F.2d 440, 443 (1st Cir.  1992)    are            __________________            as  follows.     CMT  is a  private,  for-profit Puerto  Rico            corporation  organized in 1978  to offer medical  services in            the  eastern  central region  of  Puerto Rico.    Through its            subsidiary, Turabo Medical Center Partnership,4 CMT  owns and            operates  the Hospital  Interamericano  de Medicina  Avanzada            ("HIMA"), a hospital located in Caguas, Puerto Rico.                      The  individual   plaintiffs  are  the   widow  and            children of Dr.  Jaime Soler, one of CMT's  founders, and Dr.            Jos   Badillo,  the other  founder  of  CMT.   Prior  to  the            disputed  sale  of securities  described  below,  Dr. Badillo            owned  217,500 shares  of common  voting stock of  CMT, which            constituted  16.81% of the  total 1,293,942 shares  of common            voting stock of the company  then issued and outstanding.  In            1990,  Dr. Soler  passed away,  leaving  his 435,000  shares,            which constituted 33.62% of CMT's common voting stock, to the            Soler Estate.   Appellants thus collectively owned  50.43% of            CMT's common voting stock.                                            ____________________            4.  Not a party to this suit.                                         -4-                                          4                      Appellee Joaqu n Rodr guez  was originally hired by            Drs. Soler and Badillo to  manage CMT and eventually became a            minority shareholder as well as  the chairman of its board of            directors.  The founders gave Rodr guez full  administrative,            financial, and operational control over all of the affairs of            CMT.   On November 14, 1991, Mrs. Soler replaced her deceased            husband  on  the  board.    The  other directors  during  the            relevant  periods were  appellant Dr.  Badillo and  appellees            Juan  Chaves,  Carlos M.  Pi eiro,  and Dr.  Jos   J. Vargas-            Cordero.   Rodr guez  was CMT's  president;  Dr. Badillo  its            vice-president;  Chaves   its  secretary;  and   Pi eiro  its            treasurer.  Appellee Fernando E. Agrait was an attorney hired            by Rodr guez  to handle  the in-house  legal affairs  of CMT.            Appellee  Luis  Garc a  Passalacqua   was  owner  of  Miramar            Construction,  Inc., which had  a pending business  deal with            CMT.                      Appellees  Chaves  and   Vargas-Cordero  were  also            respectively  the owner and  dean of appellee  Universidad de            Ciencias M dicas San  Juan Bautista, Inc. ("UCMSJB"),  a non-            profit company operating an independent school of medicine at            HIMA.    Appellees  Rodr guez and  Pi eiro  were  trustees of            UCMSJB.   UCMSJB  operated its  medical school  from a  space            rented from CMT for  $1.00 per year.   Prior to the  disputed            sale, UCMSJB  also owned  10,000 shares,  or 0.77%, of  CMT's            common voting stock.                                         -5-                                          5                      In 1987, CMT's shareholders authorized the issuance            of 300,000 common  voting shares of CMT and  the placement of            those  shares in a  public sale at $10  per share, subject to            registration under the Blue Sky  laws of Puerto Rico, and for            distribution  solely to residents of Puerto  Rico.  This sale            was  not  successful; very  few  of  the  shares  were  sold.            Sometime  between 1991 and  the fall of  1993, Rodr guez told            Dr. Ramon Carlos, a physician with privileges at HIMA who had            approached him to  purchase shares  in CMT,  that the  public            sale had been closed and that CMT's shares were no longer for            sale.                         During  all  of   1992  and  until   October  1993,            shareholders  meetings  of  CMT   were  not  held,   because,            according to  Rodr guez, the audited financial  statements of            the  company were  not ready.   In 1993,  Mrs. Soler  and Dr.            Badillo  [the  "plaintiff  directors"] decided  that  outside            experts should  be hired to  analyze CMT's future  plans, and            felt  that  no   corporate  assets  should  be   conveyed  or            encumbered  until  this was  done  and  the  board was  fully            informed.                      Notwithstanding this  decision, Rodriguez  insisted            upon the sale of surface  rights over HIMA's parking facility            to Miramar  Construction for  the development  of a  doctor's            office building.   Mrs. Soler opposed this sale  at a meeting            of  CMT's board of  directors held on September  9, 1993.  At                                         -6-                                          6            this same meeting,  Rodriguez reiterated a prior  request for            approval of a three-year lease  to UCMSJB of land managed and            partly owned by CMT.  Mrs. Soler and  Dr. Badillo opposed the            lease because of the nominal yearly rent of $1.00, because no            independent evaluation of the best  use of that land had ever            been performed, and because no outside independent advice had            ever  been obtained  as to  the financial  benefit to  CMT of            having  UCMSJB's school of medicine, long unaccredited by the            nationwide  accrediting  body,  affiliated  with  CMT.    The            plaintiff  directors also felt  that the  transaction between            CMT and UCMSJB,  which was effectively controlled  by Chaves,            Rodr guez,   and  Dr.  Vargas,  needed  to  be  independently            analyzed for conflicts of interest.                      Unbeknownst to  the  plaintiff  directors,  to  the            board of CMT, and to CMT as a corporate entity, Rodr guez and            Chaves had designed a scheme  to deprive plaintiffs of  their            historic majority ownership  in the company and  gain control            of CMT for themselves.   The scheme consisted of the issuance            by Rodr guez and Chaves, on September 16, 1993, without prior            knowledge or approval  of the board of  directors, of 200,000            shares of CMT  stock to UCMSJB at  a price of $10  per share,            for a total price of $2,000,000.   UCMSJB made a down payment            of $500,000, and agreed to  pay CMT the balance through eight            promissory  notes in  the amount  of  $100,000 each,  payable            consecutively  on August 1  and February 1  through February,                                         -7-                                          7            1997, at  6% annual  interest, and a  promissory note  in the            amount of $700,000 on  the same terms due on August 1, 1997.5            These  notes  were secured  by  an assignment  of  a contract            between  the  Department  of Health  of  the  Commonwealth of            Puerto  Rico and  UCMSJB by  virtue  of which  UCMSJB was  to            receive  monthly payments of $249,864.08.  This collateral is            alleged to  have been  "fictitious" because  the contract  in            question was supposedly non-assignable under Puerto Rico law.            The purposes of the scheme were allegedly to,                      a) secure control by Rodr guez and Chaves                      and approval of the  lease with UCMSJB at                      CMT's expense, b) to procure and  finance                      a substantial  block of shares  to UCMSJB                      at  a  wholly inadequate  price  and with                      fictitious  collateral,  c)  to  entrench                      management and validate  sweetheart deals                      and/or   situations   of   conflicts   of                      interest,  d)  to  dilute  and  eliminate                      plaintiffs' majority ownership in CMT, e)                      to  evict plaintiffs  from the  corporate                      board, and f) to prevent the  appointment                      of independent  outside directors  to the                      company board at the annual shareholders'                      meeting.                      At  the next board  meeting on September  29, 1993,            Rodr guez   again  insisted  that  the  three-year  lease  be            approved at no  charge, ostensibly in order to  free up other            space occupied  by the medical  school in the hospital.   The            plaintiff  directors decided at  this point firmly  to oppose                                            ____________________            5.  The verified complaint  states that the payments  were to            be  made  on  a  yearly  basis  for  seven  years.   This  is            contradicted by the  Agrait letter, infra and included in the                                                _____            complaint.   According to  the letter, payment  was to  be as            described above.                                         -8-                                          8            the lease  until  independent analysis  could  be done.    No            mention was made  at this  meeting of the  sale of shares  to            UCMSJB.                      In  early  October  1993, the  plaintiff  directors            noticed that certain  statements contained in the  minutes of            the  September 29th  meeting were  inaccurate  or misleading.            Specifically,  the minutes stated  that Mrs. Soler  had moved            for  approval of  the minutes  of the September  9th meeting,            which she had not done; reflected a motion made by Mrs. Soler            and  Dr.  Badillo  setting  forth  certain  requirements  for            consideration  of the  sale  of  surface  rights  to  Miramar            Construction, but omitted the principal requirement that such            sale  not be approved  until it was  independently determined            that it  was in CMT's  best interest; and reflected  that Dr.            Badillo had proposed  approval of the  lease to UCMSJB,  when            both he and Mrs. Soler had strongly opposed such lease.                      The  plaintiff directors decided  that the only way            to  deal  with the  increasing conflicts  of interest  was to            appoint  to CMT's board reputable and experienced independent            outside directors at the  upcoming shareholders' meeting,  to            be held  on October 28, 1993,  and to do so in  such a manner            that  these outside directors would hold a determinative vote            in case of  an impasse.  Dr. Badillo  also considered selling            the  plaintiff shareholders'  majority block  as  a means  of            ending the tense situation, but the Soler Estate decided that                                         -9-                                          9            until such time as outside directors were appointed, it would            not consider or  decide whether it wished to  sell its shares            in CMT.                      The plaintiff  directors formalized  their position            in a letter  dated October 7, 1993, a copy of which was hand-            delivered to the directors of CMT at a board  meeting held on            that date.  The letter  stated their formal opposition,  both            as directors and as majority shareholders, to the approval of            the  lease  with   UCMSJB,  complained  of  the   absence  of            information concerning the transaction, and demanded that the            board not approve  the lease until such  information had been            received and analyzed.   The board, controlled  by Rodr guez,            nonetheless approved the  lease.  Again, no  mention was made            of the sale of shares to UCMSJB.                      Following  this  meeting, the  plaintiff  directors            commenced  a  search   for  qualified  individuals  with   no            financial ties  to CMT  who would agree  to serve  as outside            directors.  Between October 10 and October 28, 1993, two such            individuals  were located and agreed to serve.  The plaintiff            directors intended at the  upcoming shareholders' meeting  to            vote  for  the  reelection  of  Rodr guez,  Pi eiro,  Vargas-            Cordero,  and themselves,  as  well as  the  two new  outside            directors, and  to retain  Rodr guez as  president and  chief            operating officer of  CMT.  It was their  intention to inform            Rodr guez  of their plans  on the night  of the shareholders'                                         -10-                                          10            meeting,  prior to  its  commencement.    However,  when  the            plaintiff directors arrived at the meeting with their counsel            and  the outside directors, Rodr guez informed them that they            no longer had  a majority position in the  company, by virtue            of the sale of shares to UCMSJB.6                      Upon learning of this sale, the plaintiff directors            walked  out of  the  shareholders'  meeting.    The  meeting,            allegedly in the absence of a quorum, then removed Mrs. Soler            and Dr. Badillo as  directors, and replaced them  with Garc a            Passalacqua.   Rodr guez then  informed the newly constituted            board of the sale to UCMSJB, and the sale was ratified.                      Prior to the  shareholders' meeting, Rodr guez  had            obtained  a letter from  CMT's inside counsel,  Agrait, dated            October 11,  1993 ("the Agrait  letter"), to the  effect that            the proposed sale  of stock to UCMSJB was  legal.  Plaintiffs            contend that this letter was deliberately intended to conceal            the  illegality of  the  sale  from  other  shareholders  and            directors.  The letter first recited the details of the sale,            as recounted above.   It then stated that the  sale was valid            under  the  1987  shareholders'  resolution  authorizing  the            issuance of 300,000 common voting  shares of CMT.  The letter            concluded that since  not all of the 300,000  shares had been                                            ____________________            6.  Following the sale to UCMSJB, there were 1,493,942 shares            of  CMT common  voting stock  outstanding.   The  plaintiffs'            652,500  shares  represented  43.68% of  the  total; UCMSJB's            210,000  represented  14.06%,  with  the  remaining   631,442            shares, or 42.27%, held by other shareholders.                                           -11-                                          11            sold, and since  the sale to UCMSJB  was a private sale  to a            single purchaser  for part of  the balance of  the authorized            but unsold shares, the sale had been implicitly authorized by            the  shareholders in  1987,  and  no  public  disclosure  and            registration  under the Blue  Sky laws were  required because            the  sale was  not  part of  an  offering  to more  than  ten            purchasers.                      The complaint  also notes that although  the Agrait            letter states that  the sale  was effected  on September  16,            1993, Agrait  wrote another  letter on behalf  of CMT  to the            Commissioner of Financial Institutions on September 27, 1993,            inquiring whether a  private sale of  securities to a  single            entity  was   subject  to  the  disclosure  and  registration            requirements of Puerto Rico Blue  Sky laws.  The September 27            latter stated that CMT was  "going to sell" 200,000 shares to            one of its shareholders.                       The complaint  also  alleges that  while  $10  per            share  was an  adequate price in  1987, when CMT  was in dire            financial straits and  on the verge of  bankruptcy, Rodr guez            and Chaves knew  that it was no longer an adequate price.  In            support  of  this  allegation,   the  complaint  states  that            Rodr guez had hired  the services of Clark  Melvin Securities            and Merrill Lynch to conduct an appraisal in  connection with            the refinancing of  CMT's debt, which  was expected to  close            shortly.  On the day of the  shareholders' meeting, Rodr guez                                         -12-                                          12            and  Chaves were  told by  a Mr.  Montilla, pursuant  to that            appraisal,  that the  market  value of  all  of CMT's  common            voting  shares  upon  approval  of  the  financing  would  be            approximately $24  million, or  at least  $18 per  share (not            counting the 200,000 shares sold to UCMSJB).                      Finally, the complaint states  that on November  3,            1993,  the plaintiffs sent  a formal  demand letter  to CMT's            management and "the illegally appointed directors,"  advising            them that  any actions taken  by the new board  after October            28,  1993  were  invalid and  illegal  and  demanding various            remedial actions including the convening of an  extraordinary            shareholders'  meeting.  After various negotiated delays, the            defendants  responded  that   under  no  circumstances  would            plaintiffs be  reinstated to the  board, and  offered to  buy            plaintiffs' shares at  approximately $5 per share.  They also            rejected plaintiffs' demand for an extraordinary shareholders            meeting,  notwithstanding  the  requirement  in  Article  IV,            Section 2 of the company by-laws that such meetings "shall be            called by  the president"  at the request  of the  holders of            more than 25% of the outstanding voting stock.                                  II.  THIS LAWSUIT.                                       ____________                      Plaintiffs' complaint alleged, on  behalf of CMT, a            violation of Section 10(b) of the Securities Exchange  Act of            1934, 15  U.S.C.    78j(b) and Rule  10b-5 of  the Securities            Exchange  Commission, 17 C.F.R.    240.10b-5.   The complaint                                         -13-                                          13            also   sought,  under   the  district   court's  supplemental            jurisdiction, see 28  U.S.C.   1367, rescission  of the stock                          ___            purchase agreement for  lack of corporate authority  and lack            of  proper consideration, annulment  of the October  28, 1993            board election,  and a new  election under  Puerto Rico  law.            The complaint was  filed on November  24, 1993, and  included            requests  for preliminary and permanent injunctions and for a            temporary  restraining  order prohibiting  any  extraordinary            disbursement  of  corporate  funds,  sale or  encumbrance  of            corporate  assets,  and  the holding  of  board  of directors            meetings during the next ten days.  The district court issued            the temporary restraining order on the same day the complaint            was filed and set a hearing on the preliminary injunction for            December 3, 1993.  At a status conference held on December 2,            1993, the  district court  consolidated consideration  of the            preliminary and permanent  injunctions, and set a  trial date            of February  7, 1994.  The temporary restraining order lapsed            by its own terms on December 3, 1993.                      CMT then filed a motion requesting realignment as a            defendant, and  for dismissal  or summary  judgment.   UCMSJB            moved   to  joint  CMT's  motion  for  dismissal  or  summary            judgment.  Agrait  filed a motion for summary  judgment.  The            remaining defendants filed a motion to dismiss.  The district            court, in  an opinion  and order filed  on February  7, 1994,            decided the motions based on the pleadings only, treating all                                         -14-                                          14            motions as motions to dismiss under Fed. R. Civ. P. 12(b)(6).            Finding that the alleged securities  fraud did not make out a            claim under    10(b) of the Securities Exchange  Act of 1934,            the  district court  dismissed  the federal  securities fraud            claim  for failure  to  state a  claim under  Rule 12(b)(6).7            Because  federal jurisdiction was based solely on that claim,            the  court declined to retain jurisdiction over the remaining            state law claims, and dismissed them without prejudice.                      The plaintiffs filed  a motion for  reconsideration            on February 21,  1994.  The district court  denied the motion            in  a  written order  dated  March  24,  1994.   This  appeal            followed.                         III. THE DISTRICT COURT'S DECISION.                              _____________________________                      The  district  court  characterized  the  case   as            presenting the question                      whether a corporation can be said to have                      been deceived in connection with the sale                      of its  securities within the  meaning of                      section 10(b) of  the Securities Exchange                      Act of  1934, when the  president and the                      secretary   authorized   the    sale   of                      allegedly  previously-issued  stock  to a                      shareholder,  without  approval   of  the                      board   of   directors   or   the   other                      shareholders.            Estate of Soler,  847 F. Supp. at  238.  The court  said that            _______________            the "in connection with" element requires a showing "that the            wrongful  conduct caused  the  plaintiff  to  engage  in  the                                            ____________________            7.  See supra n.1.                ___ _____                                         -15-                                          15            disputed   sale  or  purchase  of  securities  and  that  the            plaintiff's  injuries   are  directly  attributable   to  the            deception and  to the  resulting  transaction."   Id. at  239                                                              ___            (citing  Wilson v. Ruffa & Hanover, P.C., 844 F.2d 81, 85 (2d                     ______    _____________________            Cir. 1988)).   If the alleged  fraud does not relate  to "the            inherent  nature, characteristics  or value  of  the security            and, therefore, could not have influenced the  plaintiff in a            decision to sell or purchase the security," id. at 240, there                                                        ___            is no causal link to the disputed sale.                      The  court then said  that the alleged  omission in            this case was                      the failure of the  defendants to reveal,                      in  advance, the sale of the stock of CMT                      to  UCMSJB.     Where  a  corporation  is                      fraudulently induced into issuing its own                      securities for less than their fair value                      because of the misappropriation of inside                      information  regarding  the   stock,  the                      corporation  itself  is   injured  and  a                      shareholder    derivative    action    is                      appropriate.    Frankel v.  Slotkin,  984                                      _______     _______                      F.2d 1328, 1334 (2d Cir. 1993).  However,                      the  sale in this case did not take place                      because  the  corporation  was uninformed                      about the nature of the stock, or because                      defendants     misappropriated     inside                      information  about   the  value   of  the                      securities to  be sold.   We cannot  find                      that the  concealment of the  sale itself                      from   the    corporation   caused    the                      corporation  to  enter   into  the  sale.                      Rather than "in connection with" the sale                      of  a  security, the  deception  here was                      "of" the sale of a security.            Id.  (footnote  omitted).    The  district  court  noted  the            ___            incongruity  of suggesting "that disclosure of a sale without                                         -16-                                          16            full disclosure of some material  aspect of the sale would be            a violation of  10b-5, while failing to disclose  the sale at            all is  not  violation."   Id. at  241.   However, the  court                                       ___            concluded, Rule  10b-5 is not  meant to address  instances of            corporate mismanagement.  "Rather, it was intended to promote            full and fair disclosure to  those who buy or sell securities            in  order to  ensure  that  investors are  able  to make  the            correct decision as  to whether to carry out  the purchase or            sale."  Id. (citing Santa Fe Indus., Inc. v. Green,  430 U.S.                    ___         _____________________    _____            462, 477-78 (1977);  O'Brien v. Continental Ill. Nat.  Bank &                                 _______    _____________________________            Trust Co.,593 F.2d54, 60(7th Cir.1979)). The courtthen noted,            _________                      While we  recognize that  the failure  to                      reveal the sale at all necessarily  meant                      that information about  the nature of the                      shares  was also  concealed, because  the                      company  did  not  "know"  that  it   was                      selling  any  securities,  the  corporate                      entity  cannot  be  said   to  have  been                      deceived  as  to the  characteristics  or                      value of the securities, or  to have made                      any  decisions   based  on   a  lack   of                      knowledge   about  the   nature  of   the                      securities.            Id.   The  court  then exercised  its  discretion to  dismiss            ___            without  prejudice  the  remaining   supplemental  state  law            claims.                      On reconsideration, the district court first noted,            in response to the argument  that it had applied an incorrect            subjective test of  causality, that it had not  held that CMT            had not  relied on the  omitted information, but  rather that            the  omission was  not of the  type Rule  10b-5 was  meant to                                         -17-                                          17            remedy.  Id.   The court then discussed  plaintiffs' argument                     ___            that  it had  applied a  test of  awareness of  an investment            decision applicable to  transactions between individuals  and            entities,  not  to  transactions in  which  a  corporation is            deceived  by  its  own  management.    The  court noted  that            Goldberg  v.  Meridor, 567  F.2d  209 (2d  Cir.  1977), cert.            ________      _______                                   _____            denied, 434 U.S. 1069 (1978) and its progeny recognize that            ______                      even though some controlling directors or                      shareholders  have complete  information,                      they  can  conceal that  information  and                      utilize  it  to  the  detriment  of   the                      corporation, thus deceiving the corporate                      entity in  violation of  Rule 10b-5.   We                      agree that in the case before us,  taking                      the facts  as alleged by  plaintiffs, the                      corporation   was   deceived   when  some                      members   of  the   board  of   directors                      conducted  a  sale   of  corporate  stock                      without informing the full  board and the                      remaining shareholders.            Id.  at 242.  Nevertheless,  the court reiterated its holding            ___            that the deception  here was not in connection  with the sale            of securities  as required  for liability  under Rule  10b-5.            Id.  The court distinguished Goldberg, saying,            ___                          ________                      In  Goldberg,  the  minority shareholders                          ________                      knew that the disputed transaction was to                      take place,  but they were  deceived into                      forgoing  a  possible   state  injunction                      because   pertinent   facts   about   the                      transaction   were   not    revealed   by                      defendants.  Therefore, a decision by the                      minority shareholders not to seek a state                      injunction  was  completed   without  the                      benefit of  complete information.   Here,                      because the minority  shareholders had no                      knowledge that the transaction was taking                      place,  there   was  no   decision-making                      process of either type.                                         -18-                                          18            Id. (citation and footnote omitted).            ___                      The court also addressed plaintiffs' argument  that            the   transaction  found  actionable   under  Rule  10b-5  in            Superintendent of  Ins. v. Bankers  Life & Casualty  Co., 404            _______________________    _____________________________            U.S. 6 (1971), involved a deception unrelated to the inherent            nature, characteristics or  value of the security.  The court            in effect conceded  that this was so, saying  that in Bankers                                                                  _______            Life,            ____                      [t]he deception related to  the nature of                      the  transaction  -- that  the  plaintiff                      would be paying for its own securities --                      and   not   to  the   existence   of  the                      transactions.   We were not  intending to                      create  a hard and  fast rule as  to what                      should be deemed  "in connection with"  a                      securities  transaction,  but  merely  to                      point to  illustrative cases in  order to                      demonstrate why the  instant action falls                      outside the purview of Rule 10b-5.            Estate  of Soler,  847 F.  Supp. at  242  (citation omitted).            ________________            Finally, the court compared this case with  Ketchum v. Green,                                                        _______    _____            557  F.2d 1022  (3d Cir.  1977), cert.  denied, 434  U.S. 940                                             _____________            (1977).   In that case, a  secret scheme was  hatched to oust            certain  employees/shareholders,  which  had  the  additional            result  of forcing  them to  sell  their shares  back to  the            corporation.   The  court interpreted  the  Third Circuit  as            holding  "that the  disputed transaction  was not  actionable            under Rule  10b-5 because it  occurred in  connection with  a            struggle  for  control  of the  corporation,  rather  than in            connection  with the sale  of securities."  Id.  at 243.  The                                                        ___                                         -19-                                          19            court  concluded that the  present case similarly  involved a            dispute  over control  of  CMT, and  thus  belonged in  state            court.  Id.                    ___                                         IV.                      A.  The Standard of Appellate Review.8                 For purposes of  Fed. R. Civ. P. 12(b)(6),  a court must            accept all well-pleaded facts as true and draw all reasonable            inferences  in favor  of the  non-movant.   Washington  Legal                                                        _________________            Found. v. Massachusetts  Bar Found., 993  F.2d 962, 971  (1st            ______    _________________________            Cir. 1993) (citing  Coyne, 972 F.2d at 442-43).  "A court may                                _____            dismiss a complaint only if it is  clear that no relief could            be  granted under  any  set  of facts  that  could be  proved            consistent with the allegations."  Hishon v. King & Spalding,                                               ______    _______________                                            ____________________            8.  The district court ruled that plaintiffs  lacked standing            to maintain a private action in their individual behalves for            securities  fraud  under  Rule 10b-5,  because  they  did not            purchase  or sell  the securities  involved  in the  disputed            transaction,  citing Blue Chip  Stamps v. Manor  Drug Stores,                                 _________________    __________________            421 U.S. 723 (1975),  reh'g denied, 423 U.S. 884 (1975).  The                                  ____________            plaintiffs  have  not  appealed  from  this  decision.    The            district  court  held,  however,  that  the   plaintiffs  had            standing  to  bring a  derivative  action on  behalf  of CMT.            Appellees challenge this ruling on the ground that an "action            that is  not for the  benefit of the corporation,  but merely            seeks to  enforce the rights  of one or more  shareholders is            not  a derivative  action."   But as  we discuss,  infra, the                                                               _____            verified   complaint  adequately   alleges   injury  to   the            corporation, stating that certain of its board members caused            it  to   sell  its  own  stock,  without  disclosure  of  the            transaction  to  other,  disinterested board  members,  hence            without  disclosure to  all those  charged by  law to  act on            behalf of the  corporation, at a price far  below the stock's            actual  value,  with partial  payment  secured  by fictitious            collateral.   That the plaintiffs  may also have been injured            in a personal capacity is irrelevant to the question of their            standing to bring a derivative suit for the corporation.                                         -20-                                          20            467 U.S. 69, 73 (1984) (citing Conley v. Gibson, 355 U.S. 41,                                           ______    ______            45-46  (1957)).   An appellate  court is  not limited  to the            legal grounds  relied upon  by  the district  court, but  may            affirm on any independently sufficient grounds.  Willhauck v.                                                             _________            Halpin, 953 F.2d 689, 704 (1st Cir. 1991).            ______                    B.  Fraud Upon a Corporation by its Directors.                      "To  prevail under  Rule 10b-5,  'a plaintiff  must            prove, in connection with the purchase or sale of a security,            that  the  defendant, with  scienter, falsely  represented or                                                                       __            omitted  to disclose a material fact upon which the plaintiff            ____________________            justifiably  relied.'"   Willco  Kuwait (Trading)  S.A.K.  v.                                     ________________________________            deSavary, 843 F.2d 618, 623 (1st Cir. 1988) (quoting  Kennedy            ________                                              _______            v. Josephthal & Co., Inc., 814 F.2d 798, 804 (1st Cir. 1987))               ______________________            (emphasis  supplied).  "The Act protects corporations as well            as individuals who are sellers of a security."  Bankers Life,                                                            ____________            404  U.S. at 10.   We hold  that the district  court erred in            ruling that the verified complaint  did not state a claim for            CMT under   10(b) and Rule 10b-5.                      Briefly  recounted,  the  scheme described  in  the            complaint was allegedly hatched by CMT's president and by its            secretary, both of whom were  also its directors.  The scheme            was to cause CMT to issue and  sell 200,000 shares of earlier            authorized  common voting  stock9  to  UCMSJB      a  medical                                            ____________________            9.  The  issuance of  300,000 shares  of new  stock  had been            authorized by the shareholders in 1987, six years earlier, at            a  price of  $10 a  share, when  CMT was  allegedly close  to                                         -21-                                          21            school of which  CMT's president was a trustee,  and of which            CMT's  secretary was  the owner     for  the price  of  $10 a            share.    The  issuance  and  sale  of  stock  was  allegedly            accomplished  without  the  knowledge  or  approval  of   the            plaintiff directors,  of the board  of directors, and  of the            corporate  entity  itself.   UCMSJB  paid CMT  for  the stock            largely in  notes  secured by  an  assignment of  a  contract            between the Department of  Health of Puerto Rico and  UCMSJB.            Two  of  CMT's  other  directors  were at  the  time  closely            affiliated  with UCMSJB, while the two plaintiff directors               who between them controlled a bare majority of CMT's stock               were  unhappy with CMT's developing relationship with UCMSJB.            As  a  result   of  the  deliberately  concealed   sale,  the            proportion of CMT stock controlled by the plaintiff directors            fell  below 50%, leaving UCMSJB  and those associated with it            in practical control  of CMT.  The complaint  alleged that an            objective  of selling  the  200,000 shares  of  CMT stock  to            UCMSJB was to enable the latter to obtain a substantial block            of CMT shares at a wholly inadequate price and to finance the            stock  purchase with fictitious collateral.  According to the            complaint, the  appraised market  value of  CMT's stock  when            sold  to UCMSJB in  1993 was $18,  not $10, a  share; and the            government contract constituting collateral for the notes was                                            ____________________            bankruptcy.   Efforts to  sell the shares  at that  time were            unavailing and, it might be inferred, were abandoned.                                         -22-                                          22            non-assignable,  rendering the  collateral  fictitious.   The            complaint further alleged that, although the stock was issued            to UCMSJB on September 16,  1993, no mention was made of  the            fact at the two board  of director meetings held in September               one  held before and one after  the 16th.  By  the time of            the October shareholders' meeting,  defendants    now  firmly            in  control    revealed  the stock transaction  for the first            time  to   the  plaintiff   directors  and   former  majority            shareholders.  Plaintiffs were then ousted as directors.                      It  is by now  well established that  a corporation            has a claim under   10(b) if the corporation was defrauded in            respect to the sale of its own securities by some or even all            of its directors.  See, e.g., Goldberg, 567 F.2d at 215.   In                               _________  ________            Ruckle v. Roto  Am. Corp., 339 F.2d 24 (2d Cir. 1964), a case            ______    _______________            factually  close to the  present, a director  who represented            more than half the stock entitled  to vote at the 1964 annual            meeting  of the defendant  corporation successfully brought a            derivative  action against his six fellow directors, who also            constituted  the  corporation's   officers.    The  complaint            alleged  that the  officers had  sought  to perpetuate  their            control by, among  other ways, having  the board approve  the            issuance  of some  75,000  treasury shares  that  were to  be            resold  to  the president  or  voted  as  he directed.    The            plaintiff alleged that the defendants had withheld the latest            financial statements from the board, had arbitrarily ascribed                                         -23-                                          23            a  $3  value   to  the  shares,  and  had   approved  several            transactions involving the stock without disclosing pertinent            facts  to  the  entire  board.    Id.  at 26.    Reversing  a                                              ___            dismissal, the Second Circuit held that it was possible under            Rule 10b-5 for a corporation to be defrauded by a majority of            its directors "or  even the entire board."   Id. at 29.   The                                                         ___            court went on to say,                      If, in this case, the board defrauded the                      corporation into issuing shares either to                      its members or others, we can think of no                      reason  to say  that  redress under  Rule                      10B-5 [sic] is precluded, though it would                      have  been  available   had  anyone  else                      committed  the fraud.    There can  be no                      more  effective  way  to  emasculate  the                      policies  of the  federal securities  law                      than to  deny  relief  solely  because  a                      fraud was committed  by a director rather                      than  an outsider.   Denial of  relief on                      this  basis  would  surely  undercut  the                      congressional  determination  to  prevent                      the  public  distribution   of  worthless                      securities.            Id.            ___                      While Ruckle predated  the Supreme Court's decision                            ______            in Santa Fe,  nothing in Santa Fe and  its progeny invalidate               ________              ________            Ruckle's  relevant holding.  See,  e.g., Frankel, 984 F.2d at            ______                       __________  _______            1334 (citing  Ruckle  with approval);   see  also O'Neill  v.                          ______                    _________ _______            Maytag,   339  F.2d  764   (2d  Cir.  1964);   Schoenbaum  v.            ______                                         __________            Firstbrook,  405  F.2d 215  (2d Cir.  1968) (en  banc), cert.            __________                                              _____            denied  sub nom. Manley  v. Schoenbaum, 395  U.S. 906 (1969);            ________________ ______     __________            Santa Fe,  430 U.S. at  462; Goldberg,  567 F.2d at  209; see            ________                     ________                     ___                                         -24-                                          24            also  7 Louis  Loss &  Joel  Seligman, Securities  Regulation            ____                                   ______________________            3530-41 (3rd ed. 1991) (discussing this line of cases).                      As  in Bankers  Life, it is  here alleged  that the                             _____________            corporation  on behalf  of which  suit has  been brought  was            "injured  as an  investor through  a  deceptive device  which            deprived it of  [adequate] compensation for  the sale of  its            valuable  block  of  securities."    404 U.S.  at  10.    The            deceptive device  was that  interested directors  of CMT  and            other   parties   deliberately   omitted   to  inform   CMT's            disinterested directors and shareholders, at a time when they            might  still have  acted  to protect  CMT,  of an  impending,            allegedly deleterious, sale of stock to UCMSJB.  CMT  "relied            upon" this  omission to its  detriment, in that  its managers            issued and  sold its stock  at an allegedly  inadequate price            and without  adequate security, CMT having  been fraudulently            deprived of  the judgment of  its full board of  directors on            the  matter and,  in  particular, of  the  judgment of  those            directors  and stockholders  who  were disinterested  and not            personally  connected with UCMSJB.   Such facts  plainly make            out a claim of defendants' knowing deception of and injury to            CMT in connection with the sale of its stock.                      The district  court recognized  that, "in  the case            before us,  taking the facts  as alleged  by plaintiffs,  the            corporation was deceived  when some members  of the board  of            directors  conducted  a  sale  of  corporate  stock   without                                         -25-                                          25            informing  the full  board and  the remaining  shareholders."            Estate  of  Soler,  847 F.  Supp.  at  242.   The  court even            _________________            acknowledged that a   10(b) violation would have occurred had            the directors  been told  of the proposed  sale of  stock but            deceived  as to related material facts.   The court believed,            however,  that no violation  occurred here, because  the sale            itself was  concealed, resulting,  it said,  in no  decision-            making process at all.  We  do not see the distinction.   The            calculated  concealment  of the  sale itself,  thus depriving            CMT's disinterested  directors  of the  opportunity  to  take            steps to  prevent it before  it occurred, was an  omission to            provide  essential  material   information  to  the   company            regarding  the stock sale.  Indeed, accepting the allegations            of the complaint  as true, it is a  reasonable inference that            concealment   of  the  proposed  sale  from  CMT's  board  of            directors  was essential to  the success of  the fraud, since            the  plaintiff  directors  controlled  a  majority  of  CMT's            outstanding  shares and would  doubtless have acted  to block            the sale had they known.                      We see  no merit  in the  district court's  analogy            between this case  and Santa Fe.  In Santa Fe, acting without                                   ________      ________            fraud   or  concealment,   a  controlling   company  utilized            Delaware's  "short  form merger"  statute  to  force minority            stockholders in a subsidiary to  sell back their shares.  The            latter  sued under    10(b) asserting  a breach  of fiduciary                                         -26-                                          26            duty.   Noting the  absence of a  "manipulative or  deceptive            device," the Supreme Court  held that   10(b) is not meant to            remedy  corporate mismanagement, but  rather to  promote full            disclosure to those who buy or sell securities.  The Court in            Santa Fe  nowhere suggested  that a  deliberate stock  fraud,            ________            involving the  calculated omission  by personally  interested            directors  to tell  other  directors  that  the  company  was            selling  its  treasury  stock at  a  below  market  price and            without adequate security, was beyond the reach of   10(b).                      The allegations  here are  precisely of  a lack  of            full disclosure to  CMT, the seller of the  securities.  They            go  beyond  mismanagement to  the  calculated and  deliberate            concealment, by interested directors,  of information that  a            substantial block of the company's stock was being sold at an            improperly  low  price  to  another  company  with  whom  the            interested   directors  were  linked.    The  sale  of  CMT's            securities,  and the  price  and  terms  of  the  sale,  were            deliberately withheld to prevent the disinterested members of            CMT's  board  of  directors, who  were  also  its controlling            shareholders, from taking action prior to the completed sale.            Hence those  sharing in  the legal  responsibility to  manage            CMT's affairs were kept in the dark until the time had passed            when  they  might   still  have  acted  to   safeguard  CMT's            interests.   As there  was no "full  and fair  disclosure" to            those legally empowered to act for the corporation, there was                                         -27-                                          27            no  full and  fair  disclosure  to CMT  itself.   Unlike  the            situation in Santa Fe, the  facts alleged go well beyond mere                         ________            corporate   mismanagement  "in  which   the  essence  of  the            complaint is  that shareholders  were treated  unfairly by  a            fiduciary."  430 U.S. at 477.                        Appellees  contend  that   the  verified  complaint            alleges no more than violations  of state law, such as breach            of fiduciary  duty, and that  therefore this case  falls into            the "exception" to   10(b) liability created by Bankers Life.                                                            ____________            We  do not  agree.   That  state causes  of  action are  also            available  to the  plaintiff does  not mean  that a  right of            action will not lie  under   10(b).   "Section 10(b) must  be            read  flexibly,  not  technically and  restrictively.   Since            there was a 'sale' of a security and since fraud was used 'in            connection with' it, there is redress under   10(b), whatever            might be  available as  a remedy under  state law."   Bankers                                                                  _______            Life,  404 U.S.  at  12.   The  statement in  that case  that            ____            "[C]ongress by   10(b) did not  seek to regulate transactions            which   constitute   no    more   than   internal   corporate                                 _________________            mismanagement,"  id. (emphasis  added),  means  only  that  a                             ___            breach   of   fiduciary   duty,   "without   any   deception,            misrepresentation, or  nondisclosure," Santa Fe, 430  U.S. at                                                   ________            476,  does not violate   10(b).   Where corporate fiduciaries            deceive  other board members  and stockholders by withholding            key  information pertinent to  the corporation's sale  of its                                         -28-                                          28            own  securities, the corporation  may have redress  through              10(b).                      In dismissing the corporation's   10(b)  claim, the            district  court  also  held  that  the  defendants'   alleged            deception here was not sufficiently linked causally to a sale            of   securities.    The  court   cited  to  cases  where  the            misrepresentations  or  omissions  "did  not  relate  to  the            inherent nature,  characteristics or value of  the security."            See, e.g., Chemical  Bank v. Arthur Anderson &  Co., 726 F.2d            _________  ______________    ______________________            930  (2d Cir.),  cert. denied,  469  U.S. 884  (1984).   From                             ____________            these, the court reasoned that  simply omitting to tell CMT's            directors and  majority shareholders of the fact  of the sale            of CMT's  authorized stock  was different  from feeding  them            false information  about the  specifics of the  sale.   In so            reasoning,  the court  sought to  distinguish  cases such  as            Bankers Life, 404 U.S. at 6,  Goldberg, 567 F.2d at 209, 219-            ____________                  ________            20, and  Frankel v.  Slotkin, 984 F.2d  1328 (2d  Cir. 1993).                     _______     _______            The short  answer, we  think, is that  these cases  cannot be            distinguished.   The district court asserts that "the sale in            this  case did  not take  place because  the corporation  was            uninformed about the nature of  the stock."  Estate of Soler,                                                         _______________            847 F.  Supp. at   240.   Yet the  complaint alleges  that an            appraisal of the  stock indicated that it was  worth $18, not            $10, a share.   Had the board of  directors been so  advised,            and had it  been told of other  aspects of the sale  (such as                                         -29-                                          29            the alleged fictitious security), it might not have agreed to            the sale, and, in any  case, the minority directors (who were            majority shareholders) might have been able to take action to            block the sale.                      Nor do  we agree that  this case  is controlled  by            Ketchum v.  Green, 557 F.2d  1022 (3d  Cir. 1977).   In  that            _______     _____            case, the Third Circuit wrote:                      Upon review  of the stipulation  of facts                      and the record  of the proceedings before                      the district court, it becomes clear that                      the  case at  hand  involved little  more                      than   allegations   pertaining   to   an                      internal  corporate  conflict.   Although                      the  complaint  seemingly   stresses  the                      importance  of   the  relinquishment   of                      plaintiffs'   shares   under   the  stock                      retirement plan, the  factual stipulation                      and  other  segments  of the  record  are                      largely  silent  on  this   point.    For                      example,  it is  only  in the  concluding                      paragraphs of the  stipulation that there                      is  any mention  of  the  forced sale  of                      securities.  It thus is manifest that the                      essence of the plaintiffs' claim concerns                      their dismissal as officers of Babb, Inc.            557 F.2d at 1027 (footnote omitted).                      The  alleged  fraud  in  Ketchum  was   defendants'                                               _______            failure to reveal  their intentions to oppose  the reelection            of   the  plaintiffs  as  officers.    While  termination  of            plaintiffs  as corporate  employees  would trigger  a  by-law            forcing them to sell their stock, the Third Circuit concluded            that    10(b)  did not  apply as  the  essence of  the relief            sought  was directed  against  termination  of plaintiffs  as            officers, not  to the sale  of securities.  In  contrast with                                         -30-                                          30            Ketchum, the  stock sale  to UCMSJB is  central to  the fraud            _______            detailed  in the complaint here.  We  see no basis in Ketchum                                                                  _______            from  which to  hold  that  the present  scheme  was not  "in            connection  with"  the sale  of  a  security, as  Rule  10b-5            requires.                      We  have  considered  appellees'  other  arguments,            including  those related  to the  adequacy  of the  complaint            under  Fed. R.  Civ. P.  9(b), and  find them  to be  without            merit.  We hold that the complaint  in this case, viewed in a            light most  favorable to  the plaintiffs, states  a cause  of            action under   10(b)  and Rule 10b-5.  Of course,  nothing we            say is meant  to relieve appellants of their  burden of proof            as to  the matters alleged  in the complaint, nor  to suggest            that we accept those matters as necessarily being complete or            true.10                                            ____________________            10.  Appellees Agrait, Pi eiro, and Vargas-Cordero argue that            the  verified  complaint  alleges only  that  they  aided and            abetted the sale of stock to UCMSJB.   They cite Central Bank                                                             ____________            v.  First  Interstate Bank,  114 S.  Ct. 1439  (1994) (issued                ______________________            during the  pendency  of  this  appeal), which  held  that  a            private plaintiff could  not maintain an aiding  and abetting            suit under    10(b) and  Rule 10b-5.  Appellee  UCMSJB argues            that it was  under no duty  to inform  the appellants of  its            purchase of CMT's  stock, citing Chiarella v.  United States,                                             _________     _____________            445   U.S.  222,  234-35  (1980)  ("Section  10(b)  is  aptly            described as a catchall  provision, but what it catches  must            be  fraud.    When  an  allegation of  fraud  is  based  upon            nondisclosure,  there  can  be  no  fraud absent  a  duty  to            speak."), and Taylor v. First  Union Corp., 857 F.2d 240 (4th                          ______    __________________            Cir.  1988).   Because we  now  reverse the  district court's            judgment  dismissing  appellants' complaint,  we  think these            issues are  best left in  the first instance to  the district            court.                                         -31-                                          31                      C.  Conclusion.                      We reverse the district court's judgment dismissing            the complaint in this case for failure to  state a claim upon            which  relief  may   be  granted,  and  remand   for  further            proceedings consistent with this opinion.                      Reversed and remanded.                      _____________________                                         -32-                                          32
