Keefe, Bruyette & Woods Inc. is hoping this week to reverse an outflow of talent after an insider trading scandal involving its former chief executive officer and a porn actress.
In the last nine months, nine people have left the 170-employee boutique investment bank, which typically has a yearly turnover of one or two people.
The departures started after the company scuttled an initial public offering for a second time in May. It was later revealed that the offering, which would have been lucrative for employees of the firm, was pulled when the board learned that chief executive officer James McDermott was being investigated for giving tips about bank stocks to Kathleen Gannon, also known as Marilyn Star.
A hearing on the case is scheduled for March 22, and the trial has been set for April 3. A New York Post story over the weekend, recounting that Judge Kimba Wood has barred the prosecution from referring to Ms. Gannon as a porn actress during the trial, underscored the ridicule Keefe Bruyette has faced since the scandal broke.
But John J. Duffy, the president and co-chief executive officer of Keefe Bruyette, insisted there "is no sense of alarm" about the departures. "We are talking to some good people and are close to bringing in new talent," he said.
Many who left were lured by opportunities to join prestigious companies, such as Merrill Lynch & Co., Lehman Brothers, Salomon Smith Barney, Warburg Dillon Read, and Robertson Stephens. But people familiar with the situation say disappointment over the scuttled IPO - and the loss of a charismatic leader in Mr. McDermott - were factors as well.
The latest to bolt was senior trader Bradley Voidas, who left last week. A senior investment banker, Emmett Daly, left for a post at Merrill Lynch & Co. after 10 years at Keefe Bruyette. Frank Cicero, another investment banker, left to go to Lehman Brothers Inc. And Harold Schroeder, a research analyst, left in July.
The pulled offering "was a huge blow to the morale of the firm, which was employee owned," said one former worker who requested anonymity. Employees, who paid $208 per share to become shareholders, stood to make thousands on the deal. "It was a big payday for everybody and when it did not happen it was a big disappointment."
The cancellation of the deal "took the wind out of KBW's sails," said another former Keefe Bruyette employee who asked not to be identified. "And when James McDermott left, that was the straw that broke the camel's back."
Mr. Duffy, a veteran corporate finance person, and Joseph J. Berry, who headed the sales force, filled in the void by becoming co-chief executive officers. But some have been critical of that arrangement.
"For better or worse, McDermott was the leader of the firm," said yet another former worker. "Now there are two co-heads and that is not the optimal structure."
After the offering was scotched, Keefe Bruyette began talking to other companies about a sale, sources said. They included PaineWebber and Legg Mason. Mr. Duffy declined to comment on the discussions.
After the McDermott scandal exploded onto the front pages of daily newspapers. Keefe Bruyette employees began returning "millions of dollars worth of stock" that they bought in July, according to one source.
Mr. Duffy declined to give an exact amount but said that the employees who returned stock were a "distinct minority. It was more than a handful and less than a couple of handfuls," he said.
He said most of the people who left would have done so regardless of the scandal. "People knew that we were going public and probably decided to stick around because of that," he said. "When we didn't, they decided to leave."
