Estate of Soler v. Rodriguez

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).

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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.

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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.

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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.

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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

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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,

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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.

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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

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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'

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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.

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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

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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

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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

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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.

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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

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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

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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.

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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

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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.

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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