James J. McDermott Jr., former chairman and chief executive officer of the boutique brokerage Keefe, Bruyette & Woods Inc., was charged Tuesday by Federal authorities with leaking inside information about banks to a pornography star.
The 48-year-old Mr. McDermott, who abruptly left Keefe in June after working at the New York company 20 years, had an "intimate affair" with Kathryn Gannon and leaked information to her from at least June 1997 through April 1998, according to court papers.
The charges against Mr. McDermott were brought by the Securities and Exchange Commission and the U.S. Attorney's office for the Southern District of New York.
Mr. McDermott surrendered to the Federal Bureau of Investigation on Tuesday morning and was presented before U.S. Magistrate Theodore H. Katz in Manhattan federal court.
In both complaints, Mr. McDermott is charged with giving Ms. Gannon, whose screen name is Marylin Star, information about banks involved in mergers or being considered by his firm's clients as potential takeover targets.
Ms. Gannon then allegedly passed the information to Anthony P. Pomponio, a New Jersey businessman. Both Ms. Gannon and Mr. Pomponio were charged with the same crimes as Mr. McDermott. Mr. Pomponio was arrested Tuesday; Ms. Gannon is still a fugitive, authorities say.
The U.S. Attorney's Office said information was leaked about banks including SunTrust Inc. of Atlanta; National Australia Bank of Melbourne; the former Central Fidelity Banks Inc. of Richmond, Va.; First Commerce Corp. of New Orleans; First Commercial Corp. of Little Rock; and California State Bank in West Covina.
Ms. Gannon is accused of trading in the securities of six banks: Advanta Corp. of Spring House, Pa., whose credit card portfolio was bought by FleetBoston; Central Fidelity Banks Inc., which was bought by Wachovia Corp. of Winston-Salem, N.C.; Barnett Banks, which was bought by Charlotte, N.C.-based NationsBank, now Bank of America; First Commerce Corp., which was bought by Bank One Corp, Columbus, Ohio; First Commercial Corp., and California State Bank, which was bought by First Security Corp. of Salt Lake City.
Ms. Gannon made profits of at least $88,135 from the tips, the government alleges. Mr. McDermott also transferred at least $37,000 to Ms. Gannon in the form of certified checks, according to the government's complaint.
Mr. McDermott and the others could spend as much as 10 years in prison if convicted of all charges.
If they are convicted of insider trading, they could face 10 years in jail. If they are convicted of conspiracy they could serve five years and be fined up to $1.25 million each.
According to the U.S. Attorney's Office, the SEC began investigating the trading activities of Ms. Gannon and Mr. Pomponio in April and issued a subpoena to Ms. Gannon. When Mr. McDermott learned that Ms. Gannon had been subpoenaed by the SEC in May, he told Keefe Bruyette's directors and requested that they postpone their initial public offering a second time.
The company had canceled its first initial public offering because of poor market conditions. The second slated IPO was expected to raise approximately $85 million.
According to the complaint, Mr. McDermott admitted to Keefe's directors that he recommended certain stocks to Ms. Gannon, including the stocks of Keefe clients. But Mr. McDermott denied that the "recommendations" violated any company policies or confidentiality rules. He described the amounts as fairly small, possibly in the $20,000 to $30,000 range.
Keefe Bruyette once again canceled the initial public offering. The board forced Mr. McDermott to resign, the complaints say.
KBW said it has not been accused of any wrongdoing. The lawyer for Mr. McDermott's said the banker is innocent.
Cheryl Winokur contributed to this article.
