by John Kobler
Why a special Prohibition detail? Because few civil servants had ever proved more venal than the untrained, ill-paid recruits of the original Prohibition Unit during its first seven years under the Treas ury Department. In 1928 the unit was transferred to justice, and when that department appointed Ness, a twenty-six-year-old University of Chicago graduate, to run the special detail, he searched the personnel records for agents with, as he later put it, "no Achilles' heel in their make-ups." He finally selected nine, all under thirty and variously skilled in marksmanship, truck driving and wiretapping. Many years after, in a book and television series both entitled The Untouchables, a sobriquet purportedly bestowed by the underworld because the Ness group could be neither bought nor scared off, their achievements were wildly melodramatized. They did undoubtedly cause Capone considerable financial loss. They did accumulate enough evidence to indict him and many of his aides for conspiracy to violate the Volstead Act. They did not, however, as Ness claimed, either dry up Chicago, with its 20,000-odd places where one could buy a drink, or destroy Capone. Ness loved personal publicity. He kept the press informed of his battle plans and often, when he besieged a Capone brewery, cameramen would arrive to record the scene. This severely limited the raiders' effectiveness. The revenue agents, on the other hand, operated in such secrecy and anonymity that one of them was able to infiltrate the Capone organization in the guise of a gangster.
President Hoover did not actually initiate the investigation of Capone's tax delinquencies, but he expedited it. As early as 1927, Elmer L. Irey, the chief of Internal Revenue's Enforcement Branch, was given a powerful weapon to wield against gangsters. That year the Supreme Court handed down its decision in the case on appeal of a bootlegger named Manley Sullivan, who had filed no tax return on the grounds that income from illegal transactions was not taxable and, moreover, that to declare such income would be self-incriminatory within the meaning of the Fifth Amendment. The Supreme Court ruled against him, finding no reason "why the fact that a business is unlawful should exempt it from paying taxes that if lawful it would have to pay." As for self-incrimination, "It would be an extreme if not extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime."
Irey chose the Chicago gang lords against whom to test the new legal weapon. His first quarries were Terry Druggan, Frank Lake and their Standard Beverage Corporation. For unpaid taxes for the years 1922 through 1924 Internal Revenue had already assessed them $615,917.83. They had disregarded demands for payment until the Supreme Court ruling. They then made an offer in compromise totaling $50,000, submitting with it a statement of their assets. The bureau rejected the offer. Instead Irey set a group of his special agents, headed by Frank J. Wilson, to investigating the statement. A former Buffalo realtor, taciturn and poker-faced, chain-smoking nickel cigars, Wilson was said to "sweat ice water." He later became chief of the U.S. Secret Service. In 1927 he married a girl he met in a Washington dancing class, Judith Barbaux, the daughter of a Defense Department employee. Transferred temporarily to Chicago, Wilson and his colleagues uncovered concealed asset, of Druggan and Lake that included an apartment house, five racehorses, Cadillacs and Rolls- Royces, a farm and assorted real estate. In March, 1928, they were indicted for failing to file returns and in November, 1929, for falsifying their statement of assets. They pleaded guilty. Legal maneuvering delayed their sentences until 1932, when Federal Judge Wilkerson sent them to Leavenworth, Druggan for two and a half years, Lake for eighteen months. Shortly after the first indictment, Frank Wilson was promoted to agent in charge of the Baltimore tax district.
Irey next turned his attention to Ralph Capone. He viewed the case his special agents developed as a dress rehearsal for the major battle against brother Al. Ralph was less shrewd, less prudent than Al, and through petty greed he made the investigators' task relatively easy. In practice Internal Revenue did not prosecute tax delinquents if they voluntarily paid what they owed before investigation began. There was in the Chicago division a zealous young agent, Eddie Waters, who assigned himself the mission of lecturing gangsters, whenever he could find them, on the folly of holding out against the government. He kept after Ralph Capone for three years until finally, in 1926, Ralph weakened. He still resisted the mental labor of filling out the forms, however. Waters offered to do it for him, if he would furnish the figures. So Ralph ventured a modest estimate of $70,000 grossed between 1922 and 1925. Waters duly filled out the forms in quadruplicate, acknowledging a tax obligation of $4,065.75 and Ralph signed it. That was all Ralph did. Though he had actually made hundreds of thousands, he could not bring himself to part with the trifling sum.
The following January, Internal Revenue obtained warrants of dis traint empowering it to seize his property. Guided by cupidity, Ralph hastened to the tax collector and pleaded poverty. But, he added, if the government would accept $1,000 in full settlement, he would borrow the money. "My client," his lawyer explained, "has sustained considerable loss as the result of the sickness and death of his race horses throughout the past year. He has also lost a great deal gambling. All he has left is a half-interest in two race horses and at the present time he is using up practically all his income trying to get them into shape."
Irey had been hoping for some such clumsy lie. He instructed the Chicago agent in charge, Arthur P. Madden, to prove it so. Madden assigned to the task Archie Martin, a deceptively raffish-looking figure who had built up an encyclopedic knowledge of the enterprises the Capone syndicate owned or controlled, and Nels E. Tessem, a wispy little calculating wizard of Swedish descent. When Ralph realized he was under investigation, he raised his offer of settlement to $2,500; then, when the government rejected it, he agreed to pay the full amount. It was too late.
Shortly before the government rebuffed Ralph, the local police had raided the Subway, one of the Capone syndicate's Cicero gambling houses. According to the records they carried away and turned over to the special agents, the apparent owner was one Oliver Ellis. To save himself from an income-tax audit if he persisted in that fiction, Ellis revealed to Martin the existence of an account he kept under an alias in Cicero's Pinkert State Bank. Among the canceled checks in that account, which Tessem then began to analyze, was one for $3,200 drawn to a James Carroll. Carroll, too, Tessem learned, once carried an account in the Pinkert State Bank, but had long since closed it. As for Carroll's identity, Ellis dared not disclose it, and the bank officers insisted they knew nothing about Carroll. Tessem turned the bank inside out. He examined thousands of clearance sheets before he uncovered a clue: Carroll opened his account with a sum identical to that in the account of a James Carter when it was closed. The Carter account, furthermore, contained the same sum at the start as did the account of a James Costello the day it was closed. Tessem's lynx eyes detected another curious similarity among the different accounts. Many of the amounts deposited were divisible by 55. The current wholesale price of beer was $55 a barrel.
The series of apparently related bank accounts continued with those of a Harry Roberts, a Harry White, back finally to an account closed on October 27, 1925, and the balance transferred to Harry White. The name of that original depositor was Ralph Capone. Carroll, Carter, Costello, Roberts, White-Tessem now knew them all to be aliases under which Ralph concealed his assets. The day he pleaded poverty, for example, the account of "James Carter" totaled more than $25,000. All together, from 1925 to 1929, almost $8,000,- 000 had passed through the series of accounts.
According to the bank officers, after Ralph Capone opened the account in his own name in 1925, he never again crossed the threshold. A messenger boy always brought the money for deposit, accompanied by a short, fat, olive-skinned man. The description of the latter sug- guested Ralph's bodyguard, Tony Arresso. From rogues' gallery photographs the bank officers confirmed this. Martin and Tessem then showed some of the canceled checks that had been drawn against the five accounts to the payees-a jewel
er, various salesmen, saloonkeepers. . . . Enough of them identified Ralph Capone as the man who wrote out the checks to convince the October, 1929, grand jury of his guilt, and it returned seven indictments against him. The seventh invoked a rarely used Lincolnian statute enacted to prosecute Civil War profiteers who "cheat, swindle or defraud the Government." On October 8, as Ralph moved toward a front row seat at a Chicago prizefight, Special Agent Clarence Converse arrested him. He was released the next day in $35,000 bail, and to the syndicate's stable of lawyers fell the task of delaying trial.
It took place six months later before judge Wilkerson. Ralph was convicted, fined $10,000, and sentenced to three years' imprisonment. "I don't understand this at all," he muttered and looked to his lawyers to save him on appeal.
Neither, at first, did Al Capone understand. It was incomprehensible to him that after a decade of plundering and murdering with impunity, such a penalty could be incurred for merely withholding money owing the government. If his lawyers had ever told him about the Sullivan ruling, the knowledge had evidently failed to penetrate, for at dinner with some cronies one evening he was overheard to say: "The income-tax law is a lot of bunk. The government can't collect legal taxes from illegal money." And if his lawyers had advised him, as surely they must have, to pay up voluntarily before prosecution started, he had thus far chosen to ignore them. Ralph's indictment had shaken him, however, and after he came home from the Philadelphia prison, he retained a Washington tax lawyer, Lawrence P. Mattingly.
The Pinkert State Bank proved to be a mother lode of evidence against other tax-delinquent Caponeites. Between 1927 and 1929 it had issued almost $250,000 worth of cashier's checks to "J. V. Dunbar." The chief teller was evasive when Tessem asked him to describe Dunbar (who, it developed later, used to tip him $15 a week). Tessem found a more helpful witness in a former Pinkert teller. Dunbar's real name, he revealed, was Fred Ries. A former cashier for the Ship and other Capone gambling houses, he would bring the money with which he bought the checks in gunny sacks. The teller added a curious detail. Ries had a horror of insects. Once when a cockroach crawled out of a gunnysack full of bills, he turned ashen.
From one of his informers inside the Capone gang Wilson learned that Ries had moved to St. Louis, and he drove there with Tessem. On the chance that the cashier was receiving mail under his real name, they enlisted the aid of the post office inspectors. Shortly, a special delivery letter arrived for Ries and the agents followed the postman to its destination. Ries was reading the letter when they rang his doorbell. It came from Jake Guzik's brother-in-law, Louis Lip- schutz, and it indicated that Guzik had been paying Ries to lie low first in Miami, then in St. Louis. Guzik now wanted him to go to Mexico. As the agents drove him back to Illinois, Ries swore he had never heard of the Pinkert bank or ever gone near Cicero. Remembering what the teller had told him about Ries' entomophobia, Wilson had him committed as a material witness to a scruffy little jail in Danville, 100 miles south of Chicago, likely to be swarming with insect life. Ries held out for four days. "The bedbugs are eating me alive!" he cried when he saw Wilson again. "I'll explain those cashier's checks. But for God's sake get me away from these bugs!"
Largely on the strength of Ries' testimony a grand jury, convening in the dead of night to hear it, indicted Guzik on October 3. It was not that, like Capone, he had filed no tax returns at all, but that the income he did report for the preceding three years fell about $980,000 short of his actual net.
"Who was your boss?" the prosecutor asked Ries at the trial that began on November 12.
"Jack [as some people also called him Guzik was my immediate boss," he replied.
"Were there others?"
"Al Capone, Ralph Capone and Frank Nitti."
"What was the average net profit of a gambling house?"
"About $25,000 to $30,000, when business was good."
"Did you ever know of the house to lose money?"
"No."
"What did you do with the profits?"
"I bought cashier's checks and gave them to Bobbie Barton, Jack's chauffeur, as I had been told to do."
The prosecutor produced $144,000 worth of those checks, endorsed by Guzik. Convicted on November 18, he drew a fine of $17,500 and a five-year penitentiary sentence.
The next important Caponeite indicted by the federal grand jury was Frank Nitti. On December 20 he pleaded guilty to evading $158,823 in taxes. His sentence was a $10,000 fine and an eighteen-month prison term.
Wilson's concern was now to keep Ries alive for future use. The government made no provision for protecting witnesses before trial. So the Silent Six intervened. They put up $10,000, enabling Ries to live in South America until needed, guarded by a federal agent.
The first entries under SI (Special Investigation) -7085-F, the case jacket number assigned to Al Capone himself, antedated all these investigations. As early as the fall of 1928 Special Agent Charles W. Clarke of the Miami office was writing to Irey:
I have completely checked the public records and taken full information therefrom regarding the purchase of [the Palm Island home]. . . .
I have been able to secure from the Miami Beach Bank and Trust Company (from a detailed check of their "remittance sheets") a list of all moneys received by Capone which passed through that bank. . . . This information was obtained through leads furnished by another bank who happened to notice one item which passed the Miami Beach Bank and Trust Company. The informing bank stated that the Beach bank had come to them with a $1,500 Western Union draft payable to and endorsed by Capone and wanted large bills in it. The bank told the other bank to wash their own dirty linen and refused to have anything to do with the draft. With this lead, and after the Beach bank tried to steer me clear of their books, I was able finally to get the information, which was a long, tedious job of searching through thousands of clearance items on out-of-town banks. . . .
It is believed that Parker Henderson will give me detailed information, but I am letting the Chief of Police handle him first in order to feel out his state of mind and willingness to disclose what he knows... .
Capone while here is a lavish spender.
Thus, by January, 1929, when Secretary of the Treasury Mellon, fresh from tossing a medicine ball, transmitted to Irey the Presidential directive concerning Capone, the gang leader had been under investigation for several months. Recalling Frank Wilson from Baltimore, Irey reassigned him to Chicago with a free hand to choose any agents he wanted as assistants. He asked for Nels Tessem, William Hodgins, Clarence Converse, James N. Sullivan (of the New Haven office) and Michael F. Malone. Of Malone-Mysterious Mike Malone, his colleagues called him-Wilson wrote almost four decades later:
I thought then, and still think, [he] was the greatest natural undercover worker the Service has ever had. Five feet, eight inches tall, a barrelchested, powerful two hundred pounds, with jet black hair, sharp brown eyes underscored with heavy dark circles and a brilliant, friendly smile, Mike could easily pass for Italian, Jew, Greek or whomever the occasion demanded. He was actually "black Irish" from Jersey City. During World War One he had been in an airplane crash, then married the nurse who attended him. They had one child, a little girl, who was killed by a truck at the age of three. After that, Mike and his wife drifted apart. He went into undercover work for the government. And he seemed to lose interest in everything else. It became his total life.
The challenge confronting Wilson was to find Capone's gross income over $5,000 (the then standard exemption) for years in which he filed no return, and a formidable challenge it was since Capone, unlike his brother Ralph, never maintained a bank account or acquired property under his own name, endorsed no checks, signed no receipts, and paid cash for everything. To trap taxpayers who concealed income, Internal Revenue had developed two methods of indirect proof based on circumstantial evidence, the first involving their "net worth," the second their "net expenditure." According to the first method, the taxpayer's scale of living and any outward indication
s of wealth were analyzed. If commensurate with an income of only a few thousand dollars, Internal Revenue assumed that he had increased his net worth by an unreported amount. This gain it then declared taxable. According to the second method, the investigators applied the same yardstick to the taxpayer's running expenses aside from his accumulated assets. In Capone's case they adopted both methods.
Searching Chicago and Miami for shops, real estate agents, hotels, establishments of any kind with which Capone might have dealt, they compiled a partial list of his outlay for goods and services during the years 1926-29, together with evaluations of his fixed possessions. From two Chicago furniture companies they learned that he ordered $26,000 worth of chairs, sofas, tables, beds and rugs for his Prairie Avenue and Palm Island houses and his Hotel Lexington headquarters. Two Chicago jewelers sold him $20,000 worth of silverware, a gold-plated dinner service and personal ornaments, including thirty diamond belt buckles. His custom-made suits with the extra strong pistol pockets, his silk monogrammed shirts, shorts, undershirts, pajamas and handkerchiefs, his detachable stiff collars and flannel winter underwear-most of it from Marshall Field & Company-came to about $7,000. For Dan Serritella he once bought ten Marshall Field suits at $135 each. His Chicago hotel bills ran between $1,200 and $1,500 a week. The night of the Dempsey-Tunney fight he gave a party that cost $3,000. His telephone bills totaled $39,000. He traded in a 1924 McFarland town car, for which he had paid $5,500, against a new, more expensive model, and he also bought a $5,000 Lincoln limousine. Among the Miami purchases that Special Agent Clarke catalogued were draperies, bedspreads and upholstery ($3,225), linen, glassware and kitchen utensils ($800), meat and poultry ($20 to $50 a day), doctors' bills ($2,000). In addition to $40,000 for the Palm Island house, Capone spent $18,000 for two new docks, a boathouse and a second garage. All told the revenue detectives uncovered about $165,000 of taxable income.
