Black Hat Essay: Two Businessmen and an Adult Film Star

Mark J. Liechty
The focus of this essay is James J. McDermott (McDermott). McDermott was the CEO
of the investment bank Keefe, Bruyette & Woods. While CEO, McDermott acquired material
inside information involving the acquisitions and mergers of various companies. Central Fidelity
Banks, Inc., Advanta Corporation, Barnett Banks, Inc., First Commerce Corp., California State
Bank, and First Commercial Corp. were the acquiring businesses whose securities were
purchased and sold. An extramarital affair was occurring between McDermott and adult film
actress Kathryn B. Gannon (Gannon)(A.K.A. Marylin Star). McDermott, through his position
at the investment bank, would get material inside information about upcoming mergers and pass
this information to Gannon via the telephone. Indeed, it was phone records and the timing of
calls that constituted the evidence on which McDermott was convicted. Gannon would act on
this information by purchasing securities. Sadly for McDermott, Gannon was also involved in a
romantic relationship with New Jersey businessman Anthony P. Pomponio (Pomponio).
Gannon was passing the information, given to her by McDermott, to Pomponio, and Pomponio
was trading on the information. Eventually, the SEC was onto them and the filing of charges
ensued.1
The federal securities regulation McDermott was convicted of violating was 10b of the
Securities Exchange Act of 1934 codified as 15 U.S.C. 78j(b), which, in substantive part,
provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of any national
securities exchange . . .
(b) To use or employ, in connection with the purchase or sale of any security registered
on a national securities exchange or any security not so registered, or any securities-based
swap agreement1 any manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors. . .
, and codified as 17 C.F.R. 240.10b5 (Rule 10b-5) which provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any national
securities exchange,
(a) To employ any device, scheme, or artifice to defraud, . . .
McDermott was convicted of violating these provisions when it was proven to a jury that he gave
material, non-public information to Gannon for a personal benefit in breach of his fiduciary
duty.2

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Brief for the United States of America, United States v. McDermott, 245 F.3d 133 (2d Cir. 2001) (No. 00-1572)
United States v. McDermott, 245 F.3d 133 (2d Cir. 2001)