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April 10, 2000 12:24pm
Affair drove CEO to steal inside information, US alleges
Source: Reuters
by: Gail Appleson

NEW YORK, NY) -- An extramarital affair with an attractive blonde dancer and model drove the former head of Keefe, Bruyette & Woods Inc. to steal sensitive inside merger information from his firm and tip off his mistress, a prosecutor alleged on Monday.

The lawyer told a federal jury that James McDermott Jr. had jeopardized his high-powered career as chief executive of a respected investment banking firm to reward his lover, but what the prosecutor could not reveal during opening statements is that the former paramour is an X-rated film actress and exotic dancer with a pornographic Internet web site.

U.S. District Judge Kimba Wood, who is presiding over the case in Manhattan federal court, previously ruled that such information could distract and possibly prejudice the jury. The government had unsuccesfully argued that the mistress' occupation could help prove that she would not have knowledge of confidential merger activity on her own.

The judge's decision left assistant U.S. Attorney Alex Oh with only the use of emphasis and pregnant pauses to try to get the point over to the jury.

``On the surface James McDermott appeared to be the master of his universe,'' Oh said explaining that institutional clients relied on his advice and that the CEO was often quoted in the news media as a financial expert. ``What was not visable...he was leading a dual life that hardly anyone knew about.''

Oh said that McDermott was having an extramarital affair with a ``28-year-old woman...a blonde attractive woman ...who was a dancer and model'' who performed under the stage name Marylin Star. ``It was this affair that caused James McDermott to breach his duty of confidentiality.''

McDermott Jr., 48, of Briarcliff Manor, N.Y., is charged with allegedly giving inside tips about six mergers involving regional banks to his mistress whose real name is Kathryn Gannon.

McDermott, Gannon and Anthony Pomponio, another man with whom the actress was involved, were indicted in January for their role in the alleged two-year insider trading scheme.

The charges are based on allegations that McDermott stole the confidential information from his firm and passed it to Gannon who in turn shared it with Pomponio. Prosecutors alleged Gannon and Pomponio made more than $170,000 in illegal profits based on the non-public information. McDermott is not charged with earning any profits from the illegal trading.

While McDermott and Pomponio are on trial, Gannon has so far refused to leave Canada, where she is currently living. The trial is expected to last at least two weeks and it remains unclear whether she will appear in court.

Oh alleged that before Gannon began receiving information from McDermott, she had no experience in stock trading. When she first opened a trading account in June 1997, Oh said that Gannon bought shares of obscure regional banks instead of well-known blue-chips.

She said that Pomponio also had no trading experience but followed similar trading patterns when he opened an account one month later.

McDermott's lawyer Scott Muller said while his client admits that he had ``an affair that humiliated him,'' and that he gave trading advice to Gannon, the evidence will show he did not give stolen, confidential information to her.

``The charges in this case are false,'' Muller said. ``He (McDermott) did not steal information from his firm.''

He said that the banks were not obscure, as described by the government, and instead were prominent area banks that had been the subject of merger speculation. In at least one case, Gannon bought stock after there was a public announcement.

Muller told the jury the questions before them will be ``What did he (McDermott) say and when did he say it.''

Muller also said that his client had no motive to break the law. He said that McDermott, who earned about $4 million a year, made no money on the trades. He also did not need to give Gannon illegal stock tips because he gave her gifts of cash on personal checks bearing his name.

``There was no effort to conceal...there were no dummy accounts,'' Muller said.

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