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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42359 / January 28, 2000

Admin. Proc. File No. 3-9776

In the Matter of the Application of

Joseph G. Chiulli
7 Sunset Avenue
Lynbrook, New York 11563

For Review of Action Taken by the

National Association of Securities Dealers, Inc.

Opinion of the Commission

Registered Securities Association – Review of Disciplinary Proceeding

Violations of Rules of Conduct and Code of Procedure

Failure to Comply with Recordkeeping Requirements

Failure to Provide Requested Information

Person associated with former member firm of registered securities association failed to preserve records of firm and failed to provide information requested by association in connection with its investigation. Held, association's findings of violation and sanctions it imposed are sustained.

Appearances:

Joseph G. Chiulli, pro se

Alden S. Adkins, Susan L. Beesley, and Alan B. Lawhead, for NASD Regulation, Inc.

Appeal filed:

January 15, 1999

Last brief filed:

June 4, 1999

I.

Joseph G. Chiulli, formerly a general securities representative, general securities principal, municipal securities principal, and financial and operations principal, as well as Chief Executive Officer, Chairman of the Board, and controlling shareholder of Meridian Dunhill & Co., Inc. ("Meridian Dunhill" or "the Firm"), a former member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action.1 The NASD found that Chiulli violated Conduct Rules 2110 and 3110 by failing to preserve Meridian Dunhill's books and records.2 The NASD also found that Chiulli violated Procedural Rule 8210 as a result of his failure to respond to the NASD's request for information.3 The NASD imposed no sanctions for Chiulli's failure to preserve Meridian Dunhill's records. For his failure to respond to its requests for information, the NASD censured Chiulli, suspended him for one year from associating with any NASD member firm in any capacity, and required that he requalify by examinationbefore again acting in any capacity requiring registration.4 We base our findings on a independent review of the record.

II.

The pertinent facts supporting the violations are largely undisputed. On January 17, 1995, Meridian Dunhill ceased conducting a securities business because of a net capital deficiency. On May 10, 1995, Chiulli and his wife filed a joint voluntary Chapter 7 petition in the United States Bankruptcy Court for the Eastern District of New York.

In June 1995, Chiulli went to Florida and cleaned out the Firm's office there, sorting and boxing all of the records.5 He segregated these documents into two groups: (1) those that he believed were available from other sources, such as Meridian Dunhill's former clearing firm or accountants, and (2) original documents not available from any other source. Chiulli arranged to have the first group of documents stored at The Records Center, Inc. ("The Records Center"), a storage facility in Tampa, Florida, at a cost of approximately $194 per month. Chiulli shipped the second set of Meridian Dunhill documents, those that he believed were not available from another source, to his home in Lynbrook, New York. Chiulli stored these documents in his home and in nearby homes of friends and relatives.

Meridian Dunhill Withdraws From Broker-Dealer Registration

On July 3, 1995, Chiulli completed a Uniform Request For Withdrawal From Broker-Dealer Registration ("Form BDW") on behalf of Meridian Dunhill. Chiulli signed Form BDW immediately below the execution statement which read:

I swear or affirm that all of the information I am filing is correct and that I am authorized to execute this form for the broker-dealer, and that the broker-dealer's books and records will be preserved and available for inspection as required by law.

Chiulli listed himself where the Form requested the name of the "person who [would] have custody of [the Firm's] books and records."

Meanwhile, the NASD was investigating possible net capital violations by Meridian Dunhill and Chiulli. On December 14,1995, the NASD obtained relief from the automatic stay imposed pursuant to Chiulli's personal bankruptcy so that it could complete its investigation. The bankruptcy court ordered, however, that "the only sanctions, if any, that may be imposed [by the NASD upon Chiulli] must be non-monetary in nature."

On March 5, 1996, the bankruptcy court released Chiulli from "all dischargeable debts" and permanently enjoined Chiulli's creditors whose debts were discharged from "engaging in any act to collect such debts."6

Meridian Dunhill Files Voluntary Bankruptcy Petition

In January 1996, Chiulli filed a voluntary Chapter 7 petition for Meridian Dunhill in the United States Bankruptcy Court for the Eastern District of New York. In July 1996, the bankruptcy trustee for Meridian Dunhill petitioned the bankruptcy court to abandon the Firm's books and records located at The Records Center because of lack of funds in the estate to pay for their continued storage. Although the NASD objected to the abandonment, the bankruptcy court granted the trustee's motion to abandon the records.7

In response to the ruling of the bankruptcy court, the NASD warned Chiulli that, if he did not pay for the continued storage of the Meridian Dunhill records, the NASD would bring a disciplinary action against him. Chiulli denied responsibility for the Firm's records. On February 7, 1997, The Records Center informed the NASD that it had destroyed the records.

On February 13, 1997, the NASD issued a formal complaint charging Chiulli with failure to maintain the Meridian Dunhill records. In his answer to the NASD's complaint, Chiulli denied that the Firm's records had been destroyed. He maintained that he had shipped most of the documents he was required to preserve to Lynbrook, New York, where they were being stored. The NASD requested that Chiulli make the Lynbrook documents available for inspection, and stated that it would dismiss the complaint if he had indeed maintained the required documents.

Chiulli refused to provide the NASD with access to the documents, even after it had made a formal request to inspect thedocuments pursuant to NASD Procedural Rule 8210 and offered to inspect the documents at any location selected by Chiulli. On April 21, 1997, the NASD amended its complaint to include charges that Chiulli failed to respond to a request for information in violation of NASD Conduct Rule 2110 and Procedural Rule 8210.

The District Business Conduct Committee ("District Committee") held a hearing on August 25, 1997, during which it ordered Chiulli to make the documents in storage in Lynbrook available for inspection. Chiulli complied, and NASD staff subsequently reviewed the documents. The staff determined that a number of documents that were required to be maintained by Rules 17a-3 and 17a-4, but that would not customarily be maintained by a clearing firm, were missing. The missing documents included purchase and sale blotters, order tickets, copies of communications, customer account cards, and general ledgers.

On November 21, 1997, the District Committee censured Chiulli, fined him $35,000, barred him from associating with any member firm in any capacity, and assessed costs. Chiulli appealed to the NASD's National Adjudicatory Council ("NAC"). The NAC upheld the District Committee's finding that Chiulli violated Conduct Rules 2110 and 3110 by failing to preserve the books and records of Meridian Dunhill. The NAC declined to impose sanctions for this violation because it found Chiulli's efforts to maintain the documents in Lynbrook, New York, as well as his personal financial difficulties, were mitigating factors. The NAC also held that Chiulli violated Procedural Rule 8210 by failing to respond in a timely manner to a request to allow inspection of Meridian Dunhill's records.8 The NAC modified the sanctions imposed by the District Committee, censuring Chiulli, suspending him for one year from associating with any member firm in any capacity, and requiring that he requalify by examination before again acting in any capacity requiring registration. The NAC declined to impose a fine or costs.

III.

A. Failure to Preserve Records

The NASD found that Chiulli violated NASD Conduct Rules 2110 and 3110 by failing to preserve Meridian Dunhill's books and records. The reporting and recordkeeping requirements are important to monitor the financial status of broker-dealers and to protect the investing public.9 Chiulli does not dispute that certain Meridian Dunhill books and records were destroyed. Rather, he argues that his obligation to preserve the Firm's books and records was a "debt" that was discharged as a result of his bankruptcy.

The Bankruptcy Code defines "debt" as a "liability on a claim."10 The existence of a valid bankruptcy claim depends on (1) whether the claimant possessed a right to payment, and (2) whether that right arose prior to the filing of the petition.11

Chiulli filed his personal bankruptcy petition on May 10, 1995. On July 3, 1995, he executed Form BDW, and in so doing promised to make Meridian Dunhill's books and records available for inspection as required by law.12 Chiulli also stated on the Form BDW that he would be the person with custody of the Firm's books and records.13 Form BDW provides regulatory authorities with an individual responsible for making the requisite books and records available for inspection after the broker-dealer has withdrawn from the NASD.

Chiulli did not sign Form BDW until two months after he filed for bankruptcy protection -- i.e., the obligation that Chiulli undertook by signing Form BDW arose post-petition. Thebankruptcy court, therefore, did not discharge Chiulli from this duty.14

Chiulli next contends that, when Meridian Dunhill filed its bankruptcy petition in January 1996, custody of its books and records was transferred to the bankruptcy trustee and Chiulli's obligations with respect to those records ceased.15 We disagree that Chiulli's obligations as custodian were modified by the bankruptcy filing: on Form BDW Chiulli listed himself as thecustodian of the Firm's records.16 Moreover, by executing Form BDW, Chiulli assumed responsibility for ensuring that the Firm's records would be available for inspection.17

Chiulli also maintains that his refusal to assume responsibility for Meridian Dunhill's books and records after they were abandoned by the bankruptcy trustee was based on the advice of his counsel that his responsibility for the Firm's books and records ended when the Firm filed for bankruptcy and a trustee was appointed. Although reliance on the advice of counsel "may affect our assessment of the respondent's state of mind,"18 and therefore may mitigate the severity of his violation, Rule 3110 has no scienter requirement. Therefore, Chiulli's alleged reliance on the advice of his attorney does not absolve him of liability for failing to preserve the records.

Chiulli also attempts to justify his failure to preserve Meridian Dunhill's books and records on the basis of what he alleges is advice his attorney received from a member of the Commission's staff. However, Chiulli's attorney testified that the staff member, during a telephone conversation, stated only that he was unaware of any precedent with respect to recordkeeping requirements where both the firm and the individual are in bankruptcy and neither has the funds to maintain the books and records. Chiulli cannot credibly maintain that he based his actions on the informal statement of a Commission staff memberduring a telephone conversation in which the staff member stated he did not know the answer to Chiulli's question.

We conclude that Chiulli violated NASD Conduct Rules 2110 and 3110 by failing to preserve the books and records of Meridian Dunhill.

B. Failure to Make Records Available for Inspection

The NASD also found that Chiulli violated NASD Procedural Rule 8210 when he refused to allow the NASD to inspect the Meridian Dunhill records located in Lynbrook, New York. Rule 8210 provides a means for the NASD to obtain from its members information necessary to conduct its investigations. It is well settled that, in order for the NASD to perform its self-regulatory functions effectively, NASD members and associated persons must cooperate fully with NASD requests for information.19

Chiulli maintains that, at the time the NASD made its request, Meridian Dunhill's bankruptcy trustee, and not Chiulli, had legal control of all Firm books and records, including those located in Lynbrook. Therefore, Chiulli argues, the NASD should have made its request for the Lynbrook documents directly to the Meridian Dunhill bankruptcy trustee.

Chiulli's argument that he did not control the Lynbrook documents is erroneous. By executing Meridian Dunhill's Form BDW, Chiulli promised personally, independent of Meridian Dunhill, to provide the NASD with access to the records it requested. Moreover, as an associated person, Chiulli was responsible for responding directly to the NASD's requests for information. He had the Lynbrook documents in his physical possession and he cannot shift responsibility to the Firm for his own failure to provide timely the requested information.20

Chiulli asserts that he relied upon the advice of counsel that his responsibility with respect to Meridian Dunhill's booksand records ended when the Firm filed for bankruptcy. Reliance on counsel, however, does not excuse Chiulli from his obligation to supply information to the NASD.21 When Chiulli registered with the NASD, he agreed to abide by its rules which are unequivocal with respect to an associated person's duty to cooperate with NASD investigations.22

Nor is it sufficient that Chiulli complied with the NASD's request after the District Committee ordered him to do so. The NASD should not have to bring a disciplinary proceeding in order to obtain a response to its requests for information.23 The NASD lacks subpoena power and Chiulli substantially undermined the NASD's ability to carry out its regulatory responsibilities by failing to provide the documents when the NASD requested them.

C. Procedural Arguments

Finally, Chiulli alleges that the NASD committed a series of procedural errors and retaliated against him. For example, Chiulli contends that NASD staff interfered with the membership application of Stonebridge Securities, a firm with which Chiulli became associated as a general securities principal after the collapse of Meridian Dunhill. Chiulli, however, was given notice of the NASD's concerns about the application and an opportunity to respond. Moreover, Stonebridge's application to become an NASD member was approved shortly after Chiulli's attorney provided his response.

Chiulli also argues that the NASD violated his due process rights when it filed and later withdrew its first complaint against him. Chiulli is unable to point to any prejudice he suffered from the filing and subsequent dismissal of that disciplinary action and we therefore reject his due process claim.24

IV.

We may cancel, reduce, or require remission of a sanction imposed by the NASD if we find, having due regard for the public interest and the protection of investors, that the NASD's sanction is excessive or oppressive or imposes an unnecessary burden on competition.25 We make no such finding here.

The NAC considered a number of mitigating factors when it substantially reduced the sanctions that the District Committee had imposed on Chiulli. With respect to Chiulli's failure to preserve the books and records of Meridian Dunhill, the NAC determined that Chiulli made reasonable efforts to retain the Firm's books and records. The NAC also found Chiulli's bankruptcy and lack of financial resources to be a factor in his failure to preserve the remaining Meridian Dunhill records.26

For Chiulli's failure to allow the NASD to inspect Meridian Dunhill documents in his possession, the NAC censured him, imposed a one-year suspension, and required him to requalify by examination before again acting in any capacity requiring registration. The NAC declined to impose a fine or costs. These sanctions are below those recommended by the NASD Sanction Guidelines.27 A refusal to provide information requested by the NASD undermines its ability to carry out its self-regulatory functions. Meaningful sanctions are warranted for violations of this nature. Under these circumstances, we conclude that the sanctions imposed by the NASD are not excessive or oppressive.

An appropriate order will issue.28

By the Commission (Chairman Levitt and Commissioners Johnson, Hunt and Unger); Commissioner Carey not participating.

Jonathan G. Katz
Secretary

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 42359 / January 28, 2000

Admin. Proc. File No. 3-9776

In the Matter of the Application of

Joseph G. Chiulli
7 Sunset Avenue
Lynbrook, New York 11563

For Review of Action Taken by the

National Association of Securities Dealers, Inc.

Order Sustaining Disciplinary Action Taken by Registered Securities Association

On the basis of the Commission's opinion issued this day, it is

Ordered

that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Joseph G. Chiulli be, and it hereby is, sustained.

By the Commission.
Jonathan G. Katz Secretary


Footnotes

1 During the relevant time period, Chiulli was associated first with Meridian Dunhill, and later with NASD member Stonebridge Securities as a general securities representative, general securities principal, and financial and operations principal.

2 NASD Conduct Rule 2110 requires members to observe "high standards of commercial honor and just and equitable principles of trade." The version of NASD Conduct Rule 3110 in effect at the time the documents were destroyed required members to "keep and preserve books, accounts, records, memoranda, and correspondence in conformity with all applicable laws, rules, regulations and statements of policy promulgated thereunder . . . ." Rule 17a-3 under the Securities Exchange Act of 1934 specifies requirements with respect to the business records that must be made by broker-dealers. See 17 C.F.R. § 240.17a-3 (1999). Exchange Act Rule 17a-4 specifies, among other things, the periods during which such records and other documents relating to the broker-dealer's business must be preserved. See 17 C.F.R. § 240.17a-4 (1999).

3 The version of NASD Procedural Rule 8210 in effect in March 1997 gave the NASD the right "to investigate the books, records and accounts of any . . . member or person with relation to any matter involved in any . . . investigation or hearing."

4 Based upon the "unique circumstances" of the case, the NASD did not impose a fine or costs.

5 Meridian Dunhill was based in Florida, but Chiulli worked from an office in New York.

6 On March 25, 1996, the NASD filed a complaint against Meridian Dunhill and Chiulli alleging net capital and recordkeeping violations. The NASD withdrew this complaint in January 1998 without a hearing.

7 The bankruptcy court determined that it did not have jurisdiction over Chiulli and therefore could not order him to take possession of and preserve the records.

8 Although the NASD also charged Chiulli with violating Conduct Rule 2110 for his failure to respond to its request for information, the NAC made no finding with regard to Rule 2110. Consequently, we do not address whether Chiulli's failure to respond to the NASD's request violated Conduct Rule 2110.

9 Palm State Equities, Inc., 52 S.E.C. 333, 338 (1995).

10 11 U.S.C. § 101(12) (1999).

11 LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478, 497 (2d Cir.), cert. denied, 516 U.S. 913 (1995). See also 11 U.S.C. § 727(b) (1999)(providing that debts that are incurred after the debtor files its bankruptcy petition are not discharged); Resolution Trust Corp. v. Haught (In re Haught), 120 B.R. 233, 235 (Bankr. M.D. Fla. 1990).

12 Form BDW is adopted by rule and the information requested by the Form must be provided before an application for withdrawal is processed. 17 C.F.R. § 249.501a (1999).

13 Chiulli claims that he agreed to serve as the custodian of Meridian Dunhill's books and records, and signed Form BDW, only contingent upon retrieval from Meridian Dunhill's clearing firm of enough capital to cover the storage requirements. No part of Form BDW so provides and we reject Chiulli's attempt to introduce such a term into the Form's requirements.

14 Given these facts, we need not decide whether the obligation to preserve books and records imposed by NASD Conduct Rule 3110 and Form BDW constitutes a "debt" that is dischargeable during bankruptcy. We note, however, that courts have found that requirements to comply with legal obligations may not always be discharged in bankruptcy. See Torwico Electronics, Inc. v. New Jersey Department of Environmental Protection, 8 F.3d 146, 150 (3rd Cir. 1993) (noting that the right to force a debtor to comply with applicable laws, even if the debtor must spend money to do so, is not a "right to payment" and hence not a "debt" that is dischargeable in bankruptcy), cert. denied, 511 U.S. 1046 (1994); United States v. Whizco, Inc., 841 F.2d 147, 151 (6th Cir. 1988)(holding that debtor's obligation to comply with an environmental clean-up order was not discharged in bankruptcy to the extent debtor could comply by acting personally instead of hiring others).

15 Chiulli also argues that the NASD's disciplinary action with respect to the destroyed records proceeded in violation of the mandatory stay provision of Section 362 of the Bankruptcy Code. See 11 U.S.C. § 362(a)(1)(1999). This argument is misplaced. The NASD sought and obtained relief from this stay from the bankruptcy court. See page 4, supra. In any event, Chiulli's obligation to preserve Meridian Dunhill's records arose when he signed Form BDW, which occurred after he filed his personal bankruptcy petition. Actions arising post-petition are not subject to the automatic stay provision of Section 362(a)(1). See Federal Aviation Administration v. Gull Air, Inc. (In re Gulf Air, Inc.), 890 F.2d 1255, 1263 (1st Cir. 1989) (citing Avellino & Bienes v. M. Frenville Co., Inc., 744 F.2d 332, 335 (3d Cir. 1984), cert. denied, 469 U.S. 1160; In re Anderson, 23 B.R. 174, 175 (Bankr. N.D. Ill. 1982)).

To the extent that Chiulli argues that the NASD's action violates the mandatory stay in Meridian Dunhill's bankruptcy, we note that this action was brought by the NASD against Chiulli alone and that Meridian Dunhill has not been charged here with any violations.

16 We agree that, once Meridian Dunhill filed for Chapter 7 bankruptcy protection and a trustee was appointed, Chiulli no longer had any control over the Firm or how it elected to fulfill its obligation as a former NASD member to preserve its records.

17 Because Chiulli undertook this obligation when he signed Form BDW, we need not address the nature of any duty Chiulli had with regard to the Firm's books and records based on his position as a general securities principal and Chief Executive Officer and Chairman of the Board of Meridian Dunhill, prior to signing the form.

Because Chiulli is the only party to this proceeding, we do not address the obligations of other persons to preserve Meridian Dunhill's records, including the Firm itself. We note, however, that in Form BDW Chiulli swore only that the Firm's records "will be preserved and available for inspection." The Form did not specify that Chiulli was the only person with responsibility for the records.

18 See Gallagher & Co., 50 S.E.C. 557, 563 (1991), aff'd, 963 F.2d 385 (11th Cir.) (Table), cert. denied, 506 U.S. 979 (1992).

19 Robert A. Quiel, Securities Exchange Act Rel. No. 39056 (Sept. 11, 1997) 65 SEC Docket 1023, 1026; see also Barry C. Wilson, 52 S.E.C. 1070, 1075 (1996) ("Delay and neglect on the part of members and their associated persons undermine the ability of the NASD to conduct investigations and thereby protect the public interest.")(quoting Richard J. Rouse, 51 S.E.C. 581, 588 (1993)).

20 Michael David Borth, 51 S.E.C. 178, 180-81 (1992); see also Ashton Noshir Gowadia, Securities Exchange Act Rel. No. 40410 (Sept. 8, 1998), 67 SEC Docket 2902, 2904; Wilson, 52 S.E.C. at 1073.

21 Michael Markowski, 51 S.E.C. 553, 557 (1993), aff'd, 34 F.3d 99 (2d Cir. 1994); see also Darrell Jay Williams, 50 S.E.C. 1070, 1072 (1992) (associated person's failure to respond to NASD request for information about a transaction not excused where person, acting on advice of counsel, informed NASD he would cooperate fully once any litigation related to the transaction was resolved).

22 Wilson, 52 S.E.C. at 1073; Borth, 51 S.E.C. at 180.

23 Quiel, 65 SEC Docket at 1026; Edward C. Farni, II, 51 S.E.C. 1118, 1120 (1994); Charles R. Stedman, 51 S.E.C. 1228, 1232 (1994).

24 See, e.g., In re Alan Howard Gold, 51 S.E.C. 998, 1003(1994) (holding that party who prevailed on every charge in complaint, other than those he admitted, suffered no prejudice by the filing of the complaint), aff'd, 48 F.3d 987, 993 (7th Cir. 1995).

In his reply brief, Chiulli presented to the Commission additional documentary evidence relating to his bankruptcy, the storage of the records in New York, and Stonebridge Securities. The Commission may allow the submission of additional evidence upon a motion by a party that shows:

with particularity that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence previously.

Rule of Practice 452. Chiulli has failed to make such a motion. Moreover, Chiulli has not made the required showing of reasonable grounds for his failure to introduce this evidence before the NASD. See, e.g., Sidney C. Eng, Securities Exchange Act Rel. No. 40297 (Aug. 3, 1998), 67 SEC Docket 2175, 2185. Equally significant, the exhibits attached to Chiulli's reply brief duplicate other evidence in the record and therefore are cumulative. Id. Accordingly, we do not consider Chiulli's new evidence.

25 See Exchange Act § 19(e)(2), 15 U.S.C. § 78s(e)(2)(1994).

26 In assessing the sanctions imposed on Chiulli, we also have considered, as a mitigating factor, Chiulli's claim that he was relying on the advice of his counsel. Farni, II, 51 S.E.C. at 1120 (reliance, while not excusing the violation, can be a mitigating factor in assessing sanctions).

27 See NASD Sanction Guidelines (1996 ed.) at 22 ("Failure to Respond or Respond Truthfully or Completely; Failure to Respond in a Timely Manner"). A suspension of six months to two years, and a fine of $1,000 to $20,000, is recommended for a failure to respond timely. Id.

28 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed herein.

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Modified:02/02/2000