Wednesday, June 8, 2005

"Porn Star" Insider Trading Case Nears Its End

The long-running insider trading case involving James McDermott, former CEO of investment banking firm Keefe, Bruyette & Woods (KBW) and Kathryn Gannon, better known the adult film world as Marilyn Starr, largely came to an end with the entry of a final order in the SEC's civil enforcement action and an administrative order (here) barring McDermott from the securities industry.  In late 1999, McDermott was accused of leaking information about extraordinary transactions involving clients of KBW, which specialized in advising banks, to Gannon, with whom he had developed a close personal relationship.  Gannon opened an account and began trading shares in the companies, including Central Fidelity Banks, Inc., Advanta Corporation, Barnett Banks, Inc., First Commerce Corp., California State Bank (West Covina), and First Commercial Corp. immediately before mergers involving the banks were announced.  Gannon realized profits of $88,135, and in turn tipped another boyfriend (fidelity has never been much of a virtue in any parts of the film industry), Anthony Pomponio, who made profits of $86,378.  McDermott did not trade in any of the shares, although it was not particularly difficult to establish the tipping requirement for tipper liability under SEC v. Dirks because of the personal relationship with Gannon.

McDermott, Gannon, and Pomponio were indicted on conspiracy and insider trading charges, and Gannon fled to her native Canada.  McDermott and Pomponio were convicted -- with Pomponio also convicted of perjury related to statements made in an SEC deposition -- even though they had never met one another and McDermott had no clue that Gannon was passing on the information.  The Second Circuit reversed the convictions in 2001, holding that the government could not establish a chain conspiracy linking Pomponio and McDermott, and in an all-time great line the court noted that "[w]e decline to hold as a matter of law that a cheating heart must foresee a cheating heart."  U.S. v. McDermott, 245 F.3d 133 (2nd Cir. 2001).  McDermott then entered a guilty plea to one count of insider trading and was sentenced to time served prior to the reversal of the conviction after having been sentenced to eight months on the original conviction.  Gannon eventually was extradited from Canada and agreed to enter a guilty plea to two counts of conspiracy and was sentenced to three months in prison.  The final judgment in the SEC action required McDermott to pay approximately $230,000, which represents Gannon's profits, prejudgment interest, and a one-time penalty; Gannon was not required to pay any money due to her financial condition (see the SEC Litigation Release here).  The SEC case against Pomponio has not been settled yet. (ph)

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White Collar Crime Prof Blog and Fantasy Life have both beaten me to the punch on the latest in the SEC's long-running insider trading case involving James McDermott, former CEO of investment banking firm Keefe, Bruyette [Read More]

Tracked on Jun 9, 2005 10:01:54 AM