The U.S. District Court for the Central District of California recently granted a motion to dismiss, without prejudice, for failure to adequately plead the reliance element of a purported securities class action brought under Section 10(b) of the 1934 Securities Exchange Act.

The plaintiffs in the suit are the purchasers of Countrywide debentures sold in a private placement offering in May 2007 and in an aftermarket supported by NASDAQ’s PORTAL trading platform. In their complaint, the plaintiffs allege that they relied on both misrepresentations in Countrywide’s private placement memorandum and on the efficiency of the aftermarket.

The court held that plaintiffs failed to plead reliance with the requisite particularity. Specifically, the Court found that plaintiffs failed to allege with particularity that the PORTAL market was efficient based on its trading volume. The Court also held that plaintiffs failed to allege whether they had actually relied on the price of the Countrywide debentures trading on the PORTAL market.. Finally, the Court noted that the pleadings suggest that plaintiffs may not have relied on any market price insofar as they engaged in arbitrage and thus necessarily attempted to take advantage of pricing discrepancies arising from inefficient markets. With regard to this final point, the Court explicitly noted that arbitrageurs are still protected by the securities laws and the fraud on the market presumption.

The Court’s decision serves as a reminder that securities class actions involving securities that do not trade on widely recognized trading platforms such as the NYSE will not survive unless plaintiffs can plead with particularity that they relied on pricing from an efficient market, thereby implicating the fraud-on-the market presumption.

A copy of the Court’s decision can be found here.