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).

                             -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