Securities and Exchange Commission v. Colangelo et al

Filing 47

ORDER DENYING the Securities and Exchange Commission's motion for default judgment against defendant Terek D. Bahgat, Docket Item 44 . The SEC may move this Court within 30 days of the date of this order to reopen service-related discovery. Signed by Hon. Lawrence J. Vilardo on 4/6/20. (CEH)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
17-CV-971
DECISION & ORDER

v.
TAREK D. BAHGAT and LAURAMARIE
COLANGELO,
Defendants,
and
WEALTHCFO, LLC,
Relief Defendant

On September 28, 2017, the plaintiff, the United States Securities and Exchange
Commission (“SEC”), filed a complaint in this Court alleging that the defendant, Tarek D.
Bahgat, violated the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1–80b-21.
Docket Item 1. Bahgat has failed to answer or otherwise respond to the complaint.
On January 5, 2020, the Clerk of Court granted the SEC’s request to enter a
default against Bahgat under Rule 55(a) of the Federal Rules of Civil Procedure. Docket
Item 43. On January 21, 2020, the SEC moved this Court under Rule 55(b) to enter a
default judgment against Bahgat. Docket Item 44. More specifically, it sought an order
(1) permanently enjoining Bahgat from future violations of sections 206(1) and 206(2) of
the Advisors Act, §§ 80b-6(1) and 80(b)-6(2); (2) disgorging Bahgat of “the $378,021.97
he misappropriated from his . . . clients, plus prejudgment interest thereon of $73,433.35,”

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for a total of $409,405.62; and (3) imposing civil money penalties under section 209(e) of
the Advisers Act, 15 U.S.C. § 80b-9(e). Docket Item 44-1 at 2.
On February 17, 2020, this Court ordered the SEC to show cause why its attempts
to serve Bahgat via email comported with the requirements of the Due Process Clause of
the Fourteenth Amendment. See Docket Item 45. The SEC responded on March 23,
2020. Docket Item 46. For the reasons that follow, this Court find that service in this
matter did not comport with due process and therefore denies the SEC’s motion for
default judgment.
DISCUSSION
In its prior order, this Court explained that proper service in this matter demanded
compliance with (1) the procedural requirements of the Federal Rules of Civil Procedure
and the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents
in Civil or Commercial Matters (the “Hague Convention”) and (2) the constitutional
requirements of the Due Process Clause of the Fourteenth Amendment. Docket Item 45
at 5 (citing Burda Media, Inc. v. Viertel, 417 F.3d 292, 299, 303 (2d Cir. 2005)). This
Court then found that the SEC’s July 2019 service at the email address
“[e-mail]” satisfied the former (procedural) requirements but likely did not
satisfy the latter (constitutional) ones. See id. at 5-10. That was so because, absent
additional evidence showing that the email was “likely to reach the defendant,” id. at 9
(quoting F.T.C. v. PCCare247 Inc., 2013 WL 841037, at *3 (S.D.N.Y. Mar. 7, 2013)), the
chosen method of service “was not ‘reasonably calculated . . . to apprise [Bahgat] of the
pendency of the action and afford [him] an opportunity to present [his] objections,’” id. at
10 (quoting Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)). The
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Court therefore ordered the SEC to produce evidence showing that the email was, in fact,
“likely to reach” Bahgat.
In response, the SEC has submitted evidence that Bahgat actively used the
address “[e-mail]” through at least July 2018—that is, that Bahgat used the
address at least four months longer than indicated in the SEC’s prior submissions. See
Docket Item 46-4 at 2. The SEC argues that this new evidence demonstrates that its July
2019 email likely reached Bahgat. Id. at 5-6. It also highlights that it “did not receive any
notification that its service email to Bahgat was rejected or that the zogo.eg address was
invalid.” See id. at 7.
The Court still is not persuaded that the SEC’s chosen method of service was
“reasonably calculated . . . to apprise [Bahgat] of the pendency of the action,” see
Mullane, 339 U.S. at 314. Bahgaht’s daughter testified in August 2018 that she did not
know whether her father still used the zoho.eg address and had not recently attempted to
communicate with him using it. See Docket Item 35-3 at 10. That leaves the Court with
July 2018 as the last known date that Bahgat used the email address. And that means a
significant amount of time—more than twelve months—elapsed between Bahgat’s last
known use of the address and the SEC’s attempt to serve him. 1
Even if the SEC is correct that its burden of showing a reasonable likelihood of
receipt does not demand proof that the defendant actually opened the email, it does not
follow that the mere absence of an email “bounce back” satisfies that burden. Were that
true, a plaintiff could prove traditional-mail service by showing simply that a letter was not

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This Court again recognizes that roughly half of that time lapse was due to the
Court’s own delay in ruling on the SEC’s November 2018 motion for alternative service.
But that fact is not relevant in determining whether the chosen method of service
comported with due process requirements.
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returned as undeliverable. Such an approach would hinge a determination of whether
service was proper—that is, a defendant’s knowledge of, and liability for, a pending legal
action—on whether, for instance, a nonparty residing at a defendant’s prior address
expended the effort to return a misdirected letter or simply tossed it in the trash. That
cannot be the case. By analogy, the mere absence of a “bounce back” does little to
support the SEC’s case.
CONCLUSION
The SEC has not shown that service via email to “[e-mail]” was
“reasonably calculated . . . to apprise [Bahgat] of the pendency of [this] action,” see
Mullane, 339 U.S. at 314. Because “[a] default judgment may not be granted . . . if the
defendant has not been effectively served with process,” O’Callaghan v. Sifre, 242 F.R.D.
69, 72 (S.D.N.Y. 2007) (citation omitted), this Court denies the SEC’s motion for default
judgment. The SEC is granted leave to again move this Court to conduct discovery in
connection with its efforts to serve Bahgat, however, and, if a constitutionally-appropriate
alternative method of service becomes apparent, to ask for permission to serve Bahgat by
such means.

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ORDER
In light of the above, IT IS HEREBY
ORDERED that the SEC’s motion for a default judgment against defendant Terek
D. Bahgat, Docket Item 44, is DENIED; and it is further
ORDERED that the SEC may move this Court within 30 days of the date of this
order to reopen service-related discovery.

SO ORDERED.
Dated:

April 6, 2020
Buffalo, New York

/s/ Lawrence J. Vilardo
LAWRENCE J. VILARDO
UNITED STATES DISTRICT JUDGE

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