James J. McDermott was chief executive of a prestigious investment banking boutique and an influential Wall Street dealmaker who expected to net $16 million when his investment firm offered shares to the public.

Kathryn B. Gannon, a 30-year-old Canadian who lived in Miami, was a self-employed escort, exotic dancer and actress in adult movies, using the screen name Marylin Star. She also sold a Marylin Star "love doll," dressed in a bodice, garter and stockings, over the Internet for $69.99.

But, according to federal authorities, these different worlds were linked by one of the oldest crimes on Wall Street--illegal trading of inside information.

McDermott, 48, surrendered to the FBI yesterday morning and was arraigned in New York on federal criminal charges that he stole inside information on pending corporate mergers and gave it to Gannon, his mistress at the time. Gannon, authorities said, traded on six of the deals and also passed on the stock tips to another man she had met at an adult-film trade show at an Atlantic City casino. All told, the two made more than $170,000 in profit, according to the criminal complaint, which charges both with securities fraud and conspiracy to commit securities fraud.

The Securities and Exchange Commission, which filed a related civil complaint, caught on to the insider trades because Gannon and the other trader invested just before mergers were announced. Neither had invested in the stock market before, officials said.

McDermott, who already had all the trappings of success--including a home in the wealthy suburb of Briarcliff Manor, N.Y., and constant media attention because of his banking-industry acumen--was not charged with having personally profited from the trading. McDermott, who is married, was "shocked by the government's actions," according to his attorney, who said McDermott will be found not guilty of the charges.

Gannon is a fugitive and is thought to have fled to Canada, according to the criminal complaint. Her attorneys did not return phone calls.

Anthony P. Pomponio, 45, who allegedly received tips from Gannon, is the owner of Pomponio Industries, a company that makes industrial diamond wheels. Pomponio was arrested yesterday morning at his home in North Caldwell, N.J. His attorney, Thomas F.X. Dunn of New York, said: "He looks forward to addressing the charges in court. He will be entering a plea of not guilty."

"It's shocking and dismaying that a high-level person on Wall Street would forget the lessons of the 1980s," when a number of high-profile insider-trading cases were prosecuted, said Thomas C. Newkirk, associate director of enforcement for the SEC.

But McDermott's attorney, Denis McInerney of New York, countered that the government's behavior was appalling.

"The government has never asked to speak to Mr. McDermott or reached out to his attorneys. In fact, the first time we even heard about the U.S. attorney's investigation was last night," McInerney said, although McDermott was generally aware of the SEC probe. "We regret that the government chose to proceed in this fashion without having the benefit of hearing from Mr. McDermott. We will respond to the allegations in due course and are confident that Mr. McDermott will be exonerated when the facts are known."

Until June, McDermott was chairman and chief executive of Keefe, Bruyette & Woods, which specializes in advising banks on mergers and acquisitions. The company was planning an $85 million public offering, but once McDermott disclosed the SEC investigation to the board, the board sought his resignation and the offering was canceled, the criminal complaint said.

Gannon was also a star in her own universe, with her own World Wide Web site featuring sexually explicit photographs, a fan club and her own series of movies, "Marylin Does Miami," in which she charges her fans $600 to perform with her. "We're redefining amateur," she said in a 1998 interview.

Gannon bragged that she "fraternized" with people on Wall Street and that her clientele included high-powered investment bankers and lawyers, according to an affidavit attached to the criminal complaint.

According to the SEC, McDermott's affair with Gannon began in June 1997 and lasted through September 1998. During that time McDermott allegedly transferred at least $37,000 to Gannon, using certified checks and wire transfers, including some from a joint checking account with his wife.

Gannon opened a brokerage account at Charles Schwab & Co. on June 13, 1997, with an initial deposit of $25,800. Previously, she had held only a retirement account invested in money-market funds, the SEC said.

Within days of opening her Schwab account, Gannon allegedly began trading in the securities of relatively unknown regional banks. Each bank she traded was involved in mergers. In all but one of the cases, Keefe, Bruyette was involved in the merger negotiations, according to the federal complaint.

Pomponio opened a brokerage account on July 16, 1997, the first such brokerage account he had ever owned. Soon he began trading the same relatively unknown bank stocks that Gannon purchased, according to the SEC. Those banks were Central Fidelity Banks Inc., First Commerce Corp., California State Bank (West Covina), First Commercial Corp., Advanta Corp and Barnett Bank.

If convicted, the three face a maximum sentence of five years in prison on conspiracy charges and 10 years on securities-fraud charges, plus fines of up to $1.25 million. Pomponio also faces additional penalties on a perjury charge.

McDermott has been in negotiations to join another well-known Wall Street investment banking firm, Allen & Co. A spokesman said the firm was in the midst of doing the paperwork to hire McDermott when the story broke and McDermott was arrested.

CAPTION: James J. McDermott headed an investment banking firm.

CAPTION: Kathryn B. Gannon uses the screen name Marylin Star.