FBI Arrests 11 in Alleged Black Market Fuel Ring : Crime: ‘Self-described godfather’ of Russian Armenian mafia is accused of running organization that dealt in untaxed gas.

An FBI-led task force Tuesday arrested the “self-described godfather” of Los Angeles’ “Russian Armenian mafia” and unsealed charges accusing him and 13 associates of a pattern of racketeering, extortion and other scams--most notably running a black market diesel fuel network that supplied gas stations and truck stops throughout the region.

In announcing the arrests, federal authorities disclosed a yearlong undercover operation in which FBI and IRS agents set up a fuel business in Burbank to flush out rings believed responsible for cheating the state and federal governments out of millions of dollars in taxes.

That sting, U.S. Atty. Nora M. Manella said, enabled the task force to infiltrate the organized crime network run by Hovsep (Mike) Mikaelian, 44, of North Hollywood, who was recorded telling an undercover agent, “I’m a well-known in the Armenian community. Remember the movie ‘The Godfather,’ when they all go to the Godfather, they cry and he helps everybody? This is me.”

Mikaelian is accused of directing the massive scam that allegedly supplied two dozen gas stations and truck stops with fuel that was untaxed because it supposedly was destined for agricultural and construction vehicles. In addition, a 135-page FBI affidavit says he arranged heroin sales through a New York contact, directed the importation of Russian women for prostitution and extorted money from wealthy businessmen in the area’s huge community of emigres from the former Soviet bloc.

Mikaelian, who investigators said drove two Rolls-Royces and a Jaguar, also allegedly was supplied with some drugs by former Hollywood nightclub owner Eddie Nash, who was acquitted four years ago of the notorious 1981 “Laurel Canyon murders,” in which four people were bludgeoned to death in a supposed “drug den” just a few blocks from a house owned by then-Gov. Edmund G. (Jerry) Brown Jr.

Nash, now in his mid-60s, was also arrested in the sweep Tuesday, according to Cmdr. David J. Kalish of the Los Angeles Police Department, which participated in the task force. But drug charges against Nash are expected to be prosecuted separately from the others, in state court.

In all, 10 suspects were arrested in Los Angeles and another in New York. Three of Mikaelian’s associates avoided capture and were classified as fugitives, Manella said.

Seized in the investigation were bank accounts and property worth more than $2 million, officials said, including several of Mikaelian’s cars and a boat he kept at Marina del Rey.

Sitting on a wooden bench awaiting arraignment in the federal courthouse in Downtown Los Angeles late Tuesday, Mikaelian shook his head and denied that he was an organized crime kingpin.

“That’s not true, that’s not true,” he muttered.

Mikaelian’s attorney, Ted Flier, dismissed as likely “puffing” the tape-recorded threats and boasts attributed to his client in court papers unsealed Tuesday.

“We don’t know what’s true and what’s not true,” Flier said. “But they’re calling it the Mikaelian organization, so we’ll have to find out.”

Law enforcement officials acknowledged that some of the statements made by Mikaelian may have been the boasting commonly seen in organized crime cases--perhaps including a claim he was “closely connected to John Gotti’s nephew”--but noted that his threats allegedly were backed by a non-Armenian enforcer, Ronald Gerald Rushing, 41, dubbed the “Big Man.” Speaking to one undercover agent, Mikaelian allegedly offered to have Rushing “squeeze” someone to collect a debt, or even “smoke” them.

“I’m sure there was some puffing involved, but this was a very serious group,” said Los Angeles Police Capt. Rodger K. Coombs, who heads the department’s Organized Crime Intelligence Division, which at times provided up to 40 officers to assist the two-year investigation. The task force also used officers from the Long Beach Police Department, state Department of Justice and other agencies.

In announcing the arrests Tuesday, authorities also unsealed an Aug. 30 indictment of 10 members of a second ring--based in the San Pedro-Long Beach area--for fraudulently purchasing $8 million worth of diesel fuel over a three-month period.

This group, allegedly led by Youssef Kamel Keroles, 38, also succeeded in defrauding the sting company created by undercover FBI and IRS agents, which was called Magnum Oil, investigators revealed.

After a series of deals in which Magnum served as a middleman arranging for the group to get untaxed fuel, the suspects supposedly deposited $135,000 into a Magnum bank account for a final delivery--faxing over a deposit slip late one Friday as proof of the payment. But “they actually had only deposited $135,” said Assistant U.S. Atty. Stephen G. Larson, the lead prosecutor on the case, meaning “they ripped off the FBI.”

Later, however, cash and property seizures from the group made up for the loss many times over, he noted.

Although this group included a variety of nationalities, law enforcement officials across the country have found that emigre rings from the former Soviet bloc have seemed particularly drawn to schemes to evade excise taxes on fuel.

The federal government collects 24.4 cents per gallon, and California another 18 cents, on all fuel designed for use on the roads, with the revenue then earmarked for highway construction and repairs. Such taxes are not imposed, however, for fuel destined for off-road use, such as for agriculture or construction, and firms can obtain IRS permits to buy and sell such fuel.

Authorities say the criminal rings sometimes obtain the permits by taking over legitimate firms, or get them through fraudulent paperwork. In this case, they allegedly sold the diesel fuel not for agricultural and construction users, but to gas stations and truck stops in Los Angeles, San Bernardino, Riverside and Kern counties.

In one month alone, Mikaelian’s group avoided more than $300,000 in taxes while buying and selling 750,000 gallons of jet fuel, prosecutors said.

Eight of the group arrested Tuesday appeared late in the day before U.S. Magistrate Judge Robert M. Block, who set bail for only two of the defendants. Mikaelian was one of those ordered held without bail.

Times staff writer John M. Glionna contributed to this story.