Operators of Strip Club May Do Time

She was a popular stripper who had saved enough money in tips to open her own nude club. He was a high-rolling entrepreneur who didn’t think twice about riding in his town’s Fourth of July parade surrounded by dancers from his topless club.

Together, they transformed a quiet Christian dance club in Lake Forest into one of Southern California’s most popular strip clubs. They planned a chain of elite clubs that they hoped would bring exotic dancing into the mainstream.

But what seemed a recipe for riches may end in federal prison for the pair.

Connye G. Morgan, 60, pleaded guilty this year to tax fraud charges. Mark A. Bailey, 52, was convicted in May of hiding from the IRS more than $700,000 in strip-club door charges, cocktail tabs and tips skimmed from dancers.

Prosecutors said the two went to elaborate lengths to hide the sources of their money, stashing $300,000 in cash in a safety deposit box and claiming their Century City club was financed by former Lakers star Magic Johnson and Lakers owner Jerry Buss. Both denied involvement in the club. Bailey’s attorney said his client is innocent and will appeal the verdict.

The saga began in the late 1980s, when Bailey met Morgan at a strip club near Los Angeles International Airport. The two quickly began dating, according to court records and interviews.

A stripper who performed well into her 40s, Morgan saved enough money in tips to open a teen dance club called Jagg in Lake Forest. The club catered to Christian teens--youths who whiled away weekends sipping soft drinks and gyrating under flashing lights. The place made little money because pastors would ask to bring groups in free of charge.

Bailey, who had worked previously as a computer-systems engineer, had grander plans for the venue. He convinced Morgan to convert it into Captain Creams--a bikini bar where patrons downed beer and mixed drinks as scantily clad women wrestled in pits of shaving cream.

Under the business name Jagg Inc., Captain Creams later went topless and business started booming. The club earned a reputation as one of the busiest and most discreet in Southern California. Customers who used credit cards to buy drinks and dances were billed under the name of Jagg Restaurant and Bar, instead of Captain Creams.

“We were making a lot of money in those days,” said one of the club’s former dancers. “There weren’t a lot of other clubs in Orange County, so we were very busy.”

Once, in a demonstration of the club’s largess, Bailey offered $65,000 to an Irvine couple who lacked the money to complete their castle-style home, which was facing demolition because of city code problems. Bailey also offered the services of his dancers, who took up hammers and saws to help out. The plan backfired when the couple sued Bailey, alleging the construction work was unsuitable.

Bailey told reporters at the time that he helped out of sympathy, noting that he too faced zoning obstacles when trying to expand his empire.

While Captain Creams raked in profits, Bailey and Morgan settled in a well-to-do section of Laguna Niguel. A profile in a local newspaper portrayed Bailey as a successful businessman and popular neighbor, who built a gym in his house where his dancers worked out.

Flush with success, the couple made plans to open satellite clubs in Century City and Corona. Assistant U.S. Atty. Jean Kawahara charged that Bailey had skimmed profits from Captain Creams to finance the new clubs, and that he failed to report this “skimmed” income on his 1992, 1994 and 1995 tax returns.

The cash, according to prosecutors, came from door fees, cocktails and the strippers. Club policy at the time required that dancers, who were classified as independent contractors, pay the owners $1 for every lap dance they performed. That could amount to hundreds of dollars an evening, according to dancers.

At Bailey’s trial, prosecutors charged that Bailey and his former lawyer hid these profits by depositing the money in bank accounts small enough to avoid IRS reporting requirements and in safety deposit boxes.

By using this unreported cash, prosecutors said Jagg opened an exotic dance club in Century City in 1992. The club, Bailey’s 20/20, was at the former Playboy Club. Bailey reportedly boasted that Magic Johnson and other celebrities had supplied cash for the operation.

Two years later, Bailey and Morgan opened a club in Corona, using more unreported profits, prosectors said. In this case, prosecutors said that Bailey’s lawyer, Alan Curtis, hid $300,000 in profits in a safety deposit box before eventually paying the club’s lease with it. Curtis has since pleaded guilty to conspiracy and testified against Bailey at trial.

Eventually, the operation began to crumble.

In 1997, Bailey filed for bankruptcy protection. Two years later, Jagg was sued by the owners of the Corona strip club property, who alleged Jagg failed to make payments on the property. A judge ordered that Jagg pay the plaintiff $1.6 million.

Morgan and Bailey separated in 1999.

Bailey, according to court documents, moved to Cabo San Lucas, Mexico, where he began operating an exotic dance club and represented a firm that sells waste water treatment systems.

By that time, however, IRS investigators had begun examining his books, after they were tipped off by bank employees. Bailey was arrested in April 2001, after stepping off a plane at LAX. He had returned from Mexico to visit his parents in Beverly Hills.

Morgan, through a spokesperson, said Bailey had tricked her into signing a false tax return.

“She had no idea what was happening,” said Les Hawthorne, Jagg’s current chief operating officer. “Even people you love can do you wrong. She was guilty of felony trusting.”

Jurors took one day to deliberate before finding Bailey guilty. Bailey’s lawyer said he is confident the conviction will be overturned on appeal, claiming Morgan hid the cash.

The appeal is based on the defense being unable to compel Morgan to testify on his behalf, although the prosecution could call her as a witness. Prosecutors never exercised that option, and Morgan invoked her 5th Amendment right against self-incrimination when Bailey’s lawyer called her to the stand.

“If we were able to have her testify she would have absolved my client,” attorney Roger Diamond said. “She was the source of all the unreported cash. She owned the business and he did not. They weren’t married and, therefore, they had no property in common.”

Despite the fall of Bailey’s would-be strip-club empire, the original club, Captain Creams, continues to operate in Lake Forest. And Hawthorne said business is good.

“Things are the way they were intended to be now. Everything is good, clean entertainment,” he said.