San Diego — 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.

"I've got to tell you," says Pancer, "I personally like Fred and admire him. He was very kind to me. I remember one time he took my son and me to some fights at the Sports Arena that he was promoting. He had worked with the San Diego Police Department and Vice Squad for developing rules for topless clubs. He made a mistake for which he's paying a price, but other than that, he's just a real super guy."

Lieutenant Jim Duncan, who until recently ran SDPD's vice unit, is less sanguine.

"I think the overall impression of the guy is that he probably had a pretty lucrative business going, he seemed to try to run it the best he could, but still, all in all, he was in the adult-entertainment business, which isn't always the cleanest type of thing to be in."

Dan White, of the Federal Bureau of Prisons' central record-keeping office in Arizona, and a 20-year veteran of guarding white-collar criminals, goes further. "In my experience, most of those topless places are nothing but dens of iniquity where drug dealers and drug users and pimps and prostitutes hang out. [Having read a few paragraphs of Levy's file] I would say he is...probably an extremely well-liked individual, but very, very manipulative. But people that love him, his family and friends, don't see that side of him. It's just like in the Italian Mafia, the Catholic Church swears by these guys, because they always do the right thing by the church, or by the folks in the neighborhood. That's how they keep the love and the following of the folks who flock around them. They live two lives. They believe in living in one world and working in another."

Yet federal judge Rudi M. Brewster was apparently convinced Fred Levy's conversion was genuine. While Levy awaited sentencing, the judge allowed him to leave the country twice. First on a Caribbean cruise, then on a trip to Medellín, Colombia.

According to friends and mentors, those trips had an extraordinary effect on Levy.

The cruise, April 2 to 12, 1997, was organized by Dr. David Jeremiah, president of Christian Heritage College and senior pastor at El Cajon's Shadow Mountain Community Church. "We had maybe 250 people who went along," he says. "We had meetings every day, where we studied the scripture and had times of praise and worship. And Fred and [his wife] Penny were involved in that. We had a meal with them one day, and they told us the story of what had happened in their lives. Fred [said] he never was involved in the underworld kind of lifestyle that people wanted to impose on that part of his life. It just didn't happen. He did his best in that realm to have integrity. I don't know many people that would do what Fred did, walking away from what he walked away from. He expressed to us many times that there was nothing in the old life that held enchantment to him at all. He wanted to be free and completely away from it."

Also on that cruise was Dr. Charles W. Spicer, founding president of the Overseas Council International, an interdenominational evangelical mission organization that works in the Third World.

"Fred and his wife Penny were very excited about the concept of what we were doing, and so I invited them to go with me...to Medellín, Colombia," says Spicer. "The prime purpose was to visit the seminary that we had been helping over the last decade or so."

Once again the judge granted Levy's lawyer Michael Pancer's request for him to leave the country for a week in August 1997.

"We went to Bellavista maximum-security prison," says Spicer. "At one time they had over 5000 prisoners in a prison designed for 1500 people. These are some of the toughest guys in the world. They're hired assassins, and they're incarcerated for so many murders they cannot tell you how many -- 50 or 100, they lose track. When we started working in the prison there were probably 40 to 60 murders a month, of the most brutal kind. One of the former prisoners, Oscar Osario, whose life was changed through meeting Christ, wanted to go back in and begin to do whatever he could to live the changed life in front of some of the toughest guys. One by one they became Christians, and today the murder rate has dropped to about seven over the last two years."

"Fred was able to speak to these prisoners," says Steve Amerson, who was also on the trip, "from a point of real opulence and wealth, to say 'I've had everything. I've had Testarossas, I've had million-dollar penthouses, I've had it all, but it just really didn't mean anything to me. When it came right down to it, there was a hole and a longing in my heart and that was filled by Jesus Christ.' You could see them connect with Fred, [partly] because of some physical appearance. He's kind of dark-skinned and dark haired and if you didn't know better, you might think he was Latin. Actually, his background is of Indian and Jewish blood, but he's got a darker look to him. So here he is, a man's man, a stocky guy. You can see he's no wimp, and here he is saying, 'My life was meaningless, I had everything there was to have in this world, and yet I had nothing because I didn't have a relationship with God.' You could see the prisoners relate to him. When he was done talking and I was done singing, we were deluged by these prisoners. Here we are in the midst of these assassins, kidnappers, pickpockets...major bad guys, and they are around us hugging us and shaking our hands, they were so thankful that we came and visited them."

"Fred saw all this, and was greatly moved by it," says Spicer. "He said 'That's me,' looking at these young men sitting there."

"More than that," says Amerson, "I saw gestures of generosity by Fred that were phenomenal."

He describes a visit to a sewing factory within a women's prison. "The guy running the sewing factory was behind on making the payments for the sewing machines," says Amerson. "I saw Fred go, 'Okay, Oscar, what's it going to take? What do you need to guarantee that you're going to be able to keep these sewing machines?'"

Amerson says Levy later wrote him a check for $12,000.

"The morning we were leaving Medellín to come back home," Amerson says, choking up, "one of the Colombian seminary students had made mention he'd noticed Fred's boots, which were, I don't know, $400 or $500 boots, and said, 'Boy, those are beautiful boots!' We're getting in the van to go back to the airport, and Fred's got his tennis shoes on and reaches over and hands the guy his boots. His boots."

Still, SDPD's Lieutenant Duncan sounds skeptical. "Well, as long as those missions aren't making cocaine, I guess that's all right. [But] Colombia! Why didn't he send money to Ethiopia or someplace like that?"

At the halfway house there's a message. Fred Levy will not talk to the press until he has finished serving his sentence. He is due to be released December 31.