A type of extortion scheme known crudely as "fairy shaking" led to the arrest of a D.C. police lieutenant and toppled the police chief of the nation's capital.

It's quite simple as extortion goes: Trail a married man out of a gay sex club. Take his license plate number. And later threaten to expose him unless he pays hush money.

The term "fairy shaking" needs no definition within certain circles of the D.C. police department: A few rogue cops have been doing it for years and getting away with it, several law enforcement sources said. And it stands at the center of the case against Lt. Jeffery S. Stowe, until recently the roommate of D.C. Police Chief Larry D. Soulsby.

Based on dozens of interviews, court records and an FBI affidavit, The Washington Post has reconstructed the steps that led to Stowe's downfall and eventual arrest. His story casts light on a police department that has few safeguards against corruption and on a cop who allegedly chose to prey on those he was supposed to protect.

It's common knowledge that men go to the clubs that line a secluded block in Southeast Washington -- clubs such as the Follies Theater and La Cage -- to relax, listen to music and have sex. And as the night winds down, they straggle out onto the sidewalk. Some chat a while, and a few leave as couples.

But most stroll alone to their cars, to the glistening Jeeps, BMWs, Chevy and Ford pickups and a few late-model Dodge Caravans. No one bothers to lower his voice. It's a relaxed place, this O Street block wedged amid warehouses and the off-ramp for South Capitol Street.

A professional man, about 30 years old, in a blue Oxford shirt, explains the scene: "It's 1997, being gay, it's not a big deal anymore."

But in September, someone was watching for the most vulnerable among them. The observer noted which parked cars had baby seats and bore other evidence of the straight, married life. And he wrote down the license plate numbers.

In the days that followed, three men who were married with children received anonymous letters saying they had been photographed at the gay sex clubs. The letters demanded $10,000 cash from each in exchange for keeping their secrets.

This wasn't your typical, everyday extortionist, authorities say. He knew the extortion game better than almost anyone in town. He was, according to an arrest affidavit, Lt. Jeffery S. Stowe, commander of a D.C. police unit that investigates extortion and other crimes.

Within two hours of Stowe's arrest last Tuesday, his best friend on the force resigned: Chief Soulsby.

In the nation's capital, where shaken residents have watched as detectives solve strikingly few homicides and a dozen officers have been convicted in an FBI sting of protecting phony drug shipments in recent years, Stowe's arrest on charges of extortion and embezzlement might not seem extraordinary.

But Stowe, 42, was no ordinary police officer.

He was a 21-year member of the force and for many years had been Soulsby's buddy, golfing partner and, most recently, roommate. They shared a two-bedroom luxury apartment -- with a heavily discounted rent -- in downtown Washington. Stowe was, by personal connection, a privileged official.

And other officers hated him for flaunting it. Officer after officer last week spoke of Stowe as one who gloried in his connections to the chief, who talked repeatedly of how he could get "Larry" to solve problems and obtain scarce equipment. He arranged the chief's birthday party, took golf vacations with him and stood with Soulsby on the White House lawn during President Clinton's second inauguration this year.

He was a charter member of a small group of insiders who dined with the chief at fine K Street restaurants. When Soulsby and another close friend, Glenn Hoppert, commander of the Criminal Investigations Division, wanted to share a few laughs, they would troop into Stowe's fourth-floor office in police headquarters and close the door.

He looked and played the part of the insider, with hair swept back from his forehead and big sunglasses perched on his thin beak of a nose.

Stowe reinforced his informal status with a formidable series of professional assignments. During the late 1980s, Stowe served in the internal affairs unit, where he investigated police misconduct.

Before he was placed on administrative leave three weeks ago, Stowe was commander of the department's special investigations unit and had access to confidential reports and tens of thousands of dollars in cash intended to pay informants and protect witnesses. He could tap into the department's most secret computer files, and he could manufacture fake identifications.

All this was known to Stowe's friends and co-workers. What they didn't know was that by May 1995, this high-roller was broke.

Stowe has a sprawling palace of a dream house in Lorton, the kind of place that has "I've-got-it-made" emblazoned all over it. Fourteen windows face out on the front lawn, a vast double-door garage covers half of one end of the house, and out back, there's a deck, an enclosed porch and a big stand of red oaks.

It looked fabulous. But Stowe and his wife were living on a fiscal razor's edge.

Stowe had a $62,416 annual salary and a $345,000 outstanding mortgage. He paid $7,000 to his mortgage company to settle a bankruptcy court claim in June 1995, court records show. That same month, he submitted a form seeking reimbursement from the department's budget office of $2,500 withdrawn from a police fund he controlled.

The form he signed certified that a detective had spent the cash during an investigation. That detective later would tell the FBI that he had never spent a dime investigating the case, according to court records.

Over the next two years, Stowe obtained reimbursement for about $14,000 worth of case-related expenses. All the money went to three confidential funds that he alone controlled.

The FBI asserts that Stowe fabricated those cases and pocketed the money. Throughout that two-year period, the FBI notes, Stowe and his wife "consistently" spent more money each month than their combined take-home pay, which amounted to $80,400 a year.

When a department auditor walked into Stowe's office two years ago and asked to review the accounts that Stowe controlled, sources said, the lieutenant immediately excused himself and left the room. Soulsby called within the hour and delayed the audit, the sources said.

Mired in debt, Stowe agreed on Aug. 26, 1997, to pay his mortgage company $6,000 a month for the next six months.

By then, he was estranged from his wife and had been living in the District for about 10 months with Soulsby in a downtown apartment, Soulsby said.

Early in September, someone began lurking outside the Follies Theater on O Street SE. It is an unusual "theater." Visitors climb two short stairwells before reaching a lobby filled with pornographic pictures. They have to pay $8 to pass through a turnstile into a dimly lighted lounge area with padded chairs and electronic games.

There are places to watch movies and cubicles in which people can have sex in relative privacy. No alcohol is served.

There is no evidence that Stowe ever entered the club. But anyone who followed reports of a police raid on the club five years ago knew that it revolved around gay sex and that patrons still in the closet were vulnerable to blackmail.

The affidavit filed in court when Stowe was arraigned reads like a Hollywood screenplay. It gives the following account of the alleged extortion plot:

After jotting down three license plate numbers of family-type vehicles -- minivans and cars with children's car seats -- Stowe used the tools of his trade.

He typed the names into the law enforcement computer database, which instantly matched license plate numbers with the owners' names.

Minutes later, a telephone line connected to a computer in Stowe's office made a connection to the World Wide Web, a link that lasted about an hour.

There, Stowe found a trove of information. He learned that the men were married, where they lived, where they worked and how to reach them by telephone.

Stowe called the first victim at work Sept. 8. Stowe identified himself as "David Smith" and laid out the fruits of his research. I know your home telephone number; I know your address; I know you are married, Stowe allegedly told the man.

He threatened to send photos of the man at the Follies to his wife, employer and neighbors unless the man paid $10,000 by Sept. 12. The man balked, saying he didn't have that kind of money.

Stowe told the man that he could pay $5,000 instead. He instructed the victim to send the money by Federal Express to a postal box at a Mail Boxes Etc., a bright, neon-lighted shop with a bank of mailboxes on M Street NW. Stowe had rented the box two days earlier, using a fake Louisiana driver's license that he had manufactured on machines in police headquarters.

One last thing, Stowe told the man. Don't call the police.

The next day, the victim called the FBI.

The FBI set in motion a simple sting operation. Agents would make the payoff, and when the extortionist picked up the package, they would pounce.

The extortionist called a clerk at Mail Boxes Etc. on Sept 12. Told that the package had arrived, he promised to pick it up.

But he never showed up. Somehow, Stowe had learned of the stakeout, FBI sources say, and he asked one of his sergeants to call the FBI to ask what was going on.

The sergeant made a few inquiries and reported back: The FBI was working on a fraud case.

Stowe seemed puzzled, the officer later told the FBI. Stowe peppered him with questions: Why are they working on that? Are they monitoring that location?

The officer mentioned Stowe's line of questioning to FBI officers. For the federal agents, it sent up the first of several red flags.

Stowe made his second mistake three days later, the affidavit said, when he tried to figure out whether the agency was on to him. On his police computer, he drafted an anonymous letter from an alleged victim that outlined an identical extortion plot.

That letter said an extortionist had called the anonymous letter-writer at work and "threatened to expose my sexual preferences unless I paid him $10,000. It seems that this individual observed me enter the Green Lantern bar, which is in Washington and took pictures."

The letter identified the extortionist as a Dave Smith and instructed the victim to deliver the money to the same place in the same fashion as the man who had gone to the FBI.

Stowe assigned a detective to the phony case, and not surprisingly, the detective immediately ran into the FBI investigation. When the detective came back to police headquarters, Stowe pressed him for details of the FBI investigation.

But authorities say Stowe's stunt backfired. It was the second time they had heard his name in connection with the same investigation within three days.

"It was like a light bulb going on," said one source close to the probe. "It was a cute trick. But it's not nice to fool with the FBI."

The FBI now suspected that Stowe was the extortionist. And investigators believed that he was trying to watch them, just as he had watched his victims leave the Follies Theater.

"We are not that good," the source said. "But we are not stupid, either."

Asking themselves why a career officer would jeopardize his job, FBI agents began investigating the three police funds Stowe controlled, as well as his personal finances and bank accounts.

Agents raided Stowe's fourth-floor office in police headquarters a half-dozen times in October, repeatedly seizing documents, cash and computers. One of the raids came while Soulsby and Stowe were at a police conference in Florida. Computer specialists dissected his computer files and found traces of the letter from the bogus extortion victim. Stowe had tried to delete it days earlier, according to the affidavit.

The agents also found $2,000 in cash for the witness protection fund in Stowe's office. But they could not find any trace of $25,000 from a "confidential fund."

After Stowe returned from Florida, he made a dramatic gesture to set matters right. On Monday, Nov. 3, he walked into the police department's budget office, carrying $25,000 in cash in a plastic bag, the affidavit states.

Here, he told everyone, was the missing confidential fund money. He said he had kept the money in a "safe place." According to the affidavit, Stowe had more than $3,000 worth of $50 bills of the new design, with enlarged portraits of President Ulysses S. Grant. But those bills were not put into circulation locally until Oct. 28, so how could they be part of the missing money?

The FBI affidavit does not hazard a guess on where Stowe obtained the $25,000 in cash. On Nov. 8, agents carted away documents and videotapes from Stowe's home. Stowe also appeared twice before a federal grand jury to identify documents taken from his office. Prosecutors had yet to ask him about any alleged crimes.

But investigators moved quickly when they learned that Soulsby and Stowe shared a luxury apartment at the Lansburgh building, 425 Eighth St. NW. They feared that Stowe apparently retained enough sources to keep tabs on their investigation.

By the time federal agents searched the apartment, Stowe had moved out. So at 7:30 a.m. last Tuesday, agents pulled up in front of Stowe's house on a Lorton cul-de-sac, arrested him and brought him back to Washington. The investigation is far from finished, and many questions remain unanswered.

Stowe and his attorney assert his innocence. They say he's cooperated every step of the way and will continue to do so.

No evidence has emerged to suggest that Soulsby knew of Stowe's alleged crimes. The chief says he never visited Stowe's house, did not know of Stowe's financial problems and did not intend to block an in-house audit of the funds that Stowe controlled.

Soulsby now portrays himself as a naif caught unawares by a bad seed.

"If I knew that he was that kind of friend," he said, "I wouldn't have been hanging out with him." Staff writer Allan Lengel also contributed to this report. CAPTION: An FBI affidavit alleges that Lt. Jeffery S. Stowe, who was struggling to meet the mortgage demands of his huge house in Lorton, above, attempted to blackmail men who patronized a block of gay sex clubs, such as the Follies Theater, left, in Southeast Washington.