Opinion ID: 728933
Heading Depth: 3
Heading Rank: 2

Heading: Outside Investigation

Text: 22 As a practical matter, any investigation that Greenfield might have attempted short of discovery could not have produced facts regarding the merits of his allegations. First, BancTexas counsel admitted during oral argument that between the filing of the first and third complaints, Greenfield's only realistic course of action was to conduct discovery. Second, the nature of a securities fraud action is such that the information necessary to support the allegations of fraud must come primarily, if not exclusively, from discovery. See Thomas, 836 F.2d at 875 (stating that one factor a court may consider in determining whether an attorney has made a reasonable inquiry into the facts supporting the allegations is the extent to which development of the facts requires discovery). We earlier affirmed the district court's dismissal of Greenfield's case in part because he had failed to produce any genuine issue of fact pertaining to scienter, an essential element of a claim brought under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934. In order to prove knowledge on the part of BancTexas, it probably would have been necessary for Greenfield to have procured internal corporate documents belonging to BancTexas, documents available only through discovery. See Smith v. Our Lady of the Lake Hosp., Inc., 960 F.2d 439, 446 (5th Cir.1992) (noting that virtually all of the factual materials relevant to proving the RICO [fraud] case were beyond [Plaintiff's] reach, in the hands of the defendants). As the Smith Court noted, The essence of the alleged offense was the defendants' agreement and intent to defraud, which cannot be ascertained easily from extrinsic evidence; a party should be given some leeway in making allegations about such matters, as long as the lawyer's investigation is otherwise reasonable. Id. In this case, extrinsic investigation was, practically speaking, not an option, and discovery on the merits, Greenfield's remaining source of information, was prohibited by a local court rule and the district court's orders. 23 We need not reach the other issues raised by Greenfield or the issues raised by BancTexas in its cross-appeal. 24 REVERSED and RENDERED.