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— At the halfway house near 14th and Market, inmates sit on the balustrade, smoking cigarettes and chewing the fat. When you ask When you ask them about Fred Levy, they point toward the office around the door. The blackboard beside the desk has Levy's name written in chalk among a list of inmates, each with his release date next to the name. The young man behind the desk says Fred's out. He'll pass a message on.

Levy, the one-time king of San Diego's topless entertainment business, may be at church, as this is a Sunday. Since his troubles began, friends say the Arizona native has undergone a conversion. They report he now attends El Cajon's Black Mountain Community Church most Sunday mornings.

But it is this aging wooden house that has been home for Levy since February 17. He was sentenced to ten months in a halfway house for defrauding the U.S. Government by skimming cash from four topless San Diego nightclubs he owned, including two named Pure Platinum and two called Main Attraction.

For Levy, 60, it must be a humbling experience. At the last America's Cup, he was at the top of his game, zipping around the harbor in his vast "cigarette boat" with "Pure Platinum" bannering the hull and countless girls decorating its deck. His car of choice was a Lamborghini, according to law-enforcement sources quoted in the Union-Tribune. He had business ties in Florida. He ran yet another topless bar in Honolulu. He lived with his young wife on 100 acres in Alpine.

And he was running the ideal business for anyone wanting to give the government less than its due. The topless industry is cash rich. Everything is paid in cash, from the drinks to the five-dollar tips snapped into girls' thigh garters.

In a May 5, 1997, sentencing memorandum, the government alleged that, between 1988 and 1993, Levy had been skimming cash from the takes at his nightclubs to avoid paying taxation. The government figures he and his manager, Robert Kitto, bilked them of $686,550 during that time.

"The 'skim' was accomplished in the following manner," says the sentencing memorandum. "Kitto would go to each of the clubs in the early morning and pick up all the previous day's cash receipts. He would then 'skim' a set amount of cash from each club depending on how well the club had done the day before. He would put this cash in a leather envelope or bank bag and set it aside. He would then total up the rest of the cash receipts, make out a deposit slip, and make the bank deposit. He would also make a hand-written note which reflected the previous day's income, less the 'skim,' and give this accounting to the bookkeeper. This hand-written note was the only documentation provided the bookkeeper to record the daily income from the clubs. Finally, codefendant Kitto would bring the 'skim' to defendant Levy with all the cash register tapes. Defendant Levy and codefendant Kitto performed the 'skim' in order to conceal the extra income from the IRS."

In February 1994, federal and local investigators from the FBI, IRS, sheriff's, and San Diego Police departments raided his two Pure Platinum clubs, the Kearny Mesa offices of F. Levy Enterprises, and his Alpine home. They hauled off bags of documents, reportedly between $100,000 and $150,000 in cash, but left the Lamborghini and Levy's other cars.

The government accused Levy of filing false personal and corporate tax returns and of evading IRS scrutiny by making financial transactions with San Diego banks in cash amounts of less than $10,000. (Banks must report all cash transactions over $10,000 to the IRS.)

Twenty months later, with the IRS suing for its money in civil court, Levy's lawyer Michael Pancer made a deal. In exchange for guilty pleas on the two counts (filing false personal tax returns and false corporate tax returns), Levy was sentenced to a year at a halfway house. The charge was reduced to ten months and two weeks, a slap on the wrist compared to the maximum five years he could have gotten for conspiracy, plus three years for filing false tax returns and five years for conducting fraudulent bank transactions.

Yet Levy is reportedly a happy man. The stocky former club owner -- who said he was a former NFL player, according to James Nicholson, a trustee in a Hawaiian nightclub bankruptcy case involving Levy -- tells friends he doesn't want his nightclubs anymore and has sold them off. He doesn't even want to retain a passive financial interest in them. Levy, say his new Christian friends, is a man who has found Christ.

"This is a story of redemption, a story of hope, and a story of restoration," says Steve Amerson, an L.A.-based Christian singer who has befriended Levy during these past two difficult years. "Fred just came to a point where he cried out to God and said, 'God, either take my life or save me; get me out of this situation.' I just greatly respect that. To look and see what he has done.... He has divested himself of all the business that brought him that wealth. What's really heart-wrenching is he could have gone and fought this [conviction], but he chose basically to sacrifice ten months of his life, ten months when his wife was pregnant with her first child. It makes such little sense to 'rehabilitate' him. He's already been rehabilitated!"

But was it a genuine conversion or a commitment of convenience? Judges have seen all sorts of courtroom and cell conversions claimed by prisoners seeking sympathy from the court.

Levy's lawyer Michael Pancer denies any such possibility.

"There's no way that that could be true in this case.... When we originally went for sentencing in Fred's case, there was no mention made of the conversion that he went through. Both the government and the defense were pretty much in agreement with what the sentencing should be. So the issue of sentencing really played no role in Mr. Levy's conversion.

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