(NEW YORK, NY) -- A former chief executive officer of investment banking firm Keefe, Bruyette & Woods Inc. has been charged with insider trading for giving tips about potential bank mergers to porno actress Marylin Star who had been his mistress, U.S. prosecutors said on Tuesday.

James McDermott Jr., 48, who resigned unexpectedly in June as CEO and chairman of Keefe, Bruyette, a private Wall Street firm, was charged with securities fraud in U.S. District Court in Manhattan Tuesday. He allegedly gave non-public information to the actress, Kathryn Gannon, about six upcoming mergers involving regional banks.

McDermott and Gannon, also a defendant in the case, had an "intimate relationship," during the time of the alleged scheme, court papers said. Gannon allegedly made about $88,100 from trades based on the insider information in 1997 and 1998.

Gannon, 30, a Canadian citizen who has lived in Miami, has worked as an actress in adult films, and as an escort, exotic dancer and model, according to court papers. She uses the name Marylin Star in her adult films and in a sexually graphic Internet web site, the papers said.

The complaint alleges that Gannon passed the tips to a third defendant, Anthony Pomponio, 45, of North Caldwell, N.J., with whom she was also having a relationship. Pomponio is a majority owner of an industrial diamond wheel manufacturing company called Pomponio Industries, court papers said. He allegedly made about $86,378 from trades based on the inside information.

Gannon and Pomponio met in Atlantic City, where she was attending a trade show for the adult movie industry. Gannon boasted that she had clients in New York City who were "well connected Wall Street types" including lawyers, stockbrokers and other "high level people," court papers said.

The criminal complaint alleges that McDermott now works at investment bank Allen & Co. in New York, but the firm said the information is incorrect.

Bob Cosgriff, Allen & Co. managing director and chief administrative officer, said McDermott has never worked at the firm, but is seeking employment there. A spokesman for the U.S. Attorney for the Southern District, which filed the criminal complaint, would not comment.

The three defendants were also named in a related Securities and Exchange Commission civil suit filed in Manhattan federal court.

McDermott, of Briarcliff Manor, N.Y., surrendered to authorities Tuesday morning. Gannon is a fugitive, and Pomponio was arrested at his home Tuesday morning, prosecutors said.

Keefe, Bruyette is an investment banking firm that advises companies in connection with mergers and acquisitions and specializes in the banking and financial services industries.

From January 1994 through December 1998, Keefe, Bruyette acted as the financial advisor in 116 announced mergers and acquisitions of banks and thrifts.

As president of Keefe, Bruyette during 1997 and chairman and CEO from Jan. 1, 1998 until his resignation, McDermott had access to non-public information about the firm's clients.

Federal prosecutors said McDermott had advised Keefe, Bruyette's board of directors that he had been subpoenaed in an SEC probe in June. The board then forced him to resign, prosecutors alleged. Keefe, Bruyette then also canceled an initial public stock offering that was expected to raise $85 million.

According to court papers, McDermott and Gannon had an affair for about fourteen months from June 1997 through September 1998. He allegedly transferred about $37,000 to Gannon in certified checks and wire transfers during this time. Some of the money came from a joint bank account McDermott shared with his wife at Chase Manhattan Corp (NYSE:CMB - news).

He also allegedly passed along tips to Gannon about the upcoming mergers. Gannon opened a brokerage account at Charles Schwab & Co. in June 1997, with an initial deposit of $25,800.

"Gannon had minimal investment experience; her only other securities investment up to this time was an IRA account at Schwab," according to the SEC suit.

Within days of opening the account, Gannon began trading in securities of relatively unknown regional banks. In all but one of the stock purchases, Keefe, Bruyette represented the target in the merger transaction or was associated with one of the parties to the transaction, the SEC suit said.

Pomponio opened an account at Schwab a month after Gannon. The court papers said it was the first brokerage account he had ever owned, and that he soon began trading in the same stocks as Gannon.