Wall Street's Deep Throat

By Karl Taro Greenfeld

There is a reckless streak in many of us, a brashness that is usually channeled harmlessly into leisure pursuits like bungee jumping or indulgences such as an extra piece of chocolate-mousse cake. But for James McDermott, 48, the former chief executive of the New York City investment bank Keefe, Bruyette & Woods, that recklessness led to the arms of an adult-video actress and then to the even longer arms of the law. The banker was charged last week with insider trading for allegedly tipping off Kathryn Gannon, 30, better known as Marylin Star, to a series of impending bank mergers. According to federal prosecutors, the Canadian-born actress traded six times on this information and made $88,000 through an online brokerage account--often investing money McDermott sent via certified checks drawn on a bank account he shared with his wife. McDermott was freed on $1 million bail last week, and authorities issued an arrest warrant for Gannon, who was believed to be in Canada.

I met Marylin Star four years ago during a video shoot for Wicked Pictures, one of the leading adult production companies. I was writing a story about the $5 billion adult-entertainment industry, and she represented, in many ways, the heart and dark soul of that industry: a pretty, vivacious, surgically enhanced blond woman who was paid thousands of dollars to have sex on tape.

Before the video camera rolls at a shoot, adult performers present each other with identification and valid--less than 90-day-old--HIV tests to prove that neither performer carries the virus. The exchange is routine and ritualistic, like a coin toss before a football game. I was watching and noticed that Marylin Star's driver's license read Kathryn Akahoshi, prompting me to ask why this blond had a Japanese name. She had become a stripper in Calgary while still a teenager, hitting Los Angeles in the mid-'90s to enter the adult-video business and then diving into a marriage with a Japanese businessman. The couple subsequently divorced. She was articulate and confident, and I got the feeling that for her, real life was what you did while looking for the next big score. Then she said something that struck me as unusual coming from an adult-video actress: "I'm really into the stock market."

Perhaps that's what drew her to McDermott, or at least elevated their relationship to the point where she boasted to friends about her "really rich boyfriend." McDermott was certainly a man who knew the market, having worked his way up from entry-level research analyst to CEO of Keefe, Bruyette & Woods, a boutique investment bank. The firm was on the verge of what would have been his crowning achievement, a $100 million public offering last May. But days before the IPO, the firm canceled the deal when McDermott told his partners he was under investigation by the Securities and Exchange Commission for giving stock tips to a friend. "It wasn't until I saw the subpoena that I saw a name attached to this so-called friend," says John Duffy, the firm's current CEO. "Clearly there were things he didn't tell us. Fortunately, Jim has been gone for six months. I kind of wish it was six years."

--With reporting by William Dowell/New York

With reporting by WILLIAM DOWELL/NEW YORK