he story begins with Officer Cole Phelps on the Patrol Desk at the Wilshire Division 7 Police Station as a fairly new member of the police department in 1947 Los Angeles, California, successfully investigating a murder with his partner, Officer Ralph Dunn . The Movie follows Phelps' progress through the ranks and through different departments, such as the Homicide department, where he defeats a serial, and shows the collapse of his reputation and marriage to Marie after being publicly exposed on falling for German lounge singer Elsa Lichtmann .
When a U.S. Marine from Phelps's former unit is found brutally murdered, Phelps discovers many of his former squad members are being assassinated as well, and after meeting with his old comrade, Jack Kelso , he deduces that the men in his unit were selling surplus morphine after stealing a large supply from the USS Coolridge, the ship that carried the unit back to Los Angeles at the end of World War II. The men are being killed by mobsters who are working for Mickey Cohen who controls the drug trade and resent the competition.
Further investigations by Phelps and Kelso lead them to discover that the money from the morphine sales is being used to fund a program known as “The Suburban Redevelopment Fund.” They discover that while the fund publicly has good intentions it is actually a front for an insurance fraud scam, run by a tycoon named Leland Monroe, where sub-standard houses are built and then fall victim to arson in order apparently to claim the insurance money. This is finally revealed to be only a small part of the fraud, as the true fraud was against the federal government regarding eminent domain. The Suburban Redevelopment Fund aimed to build entire communities, albeit with matchstick houses, to fool the federal government into paying much higher prices for the land where they were constructed, as they are in the path of the proposed Whitnall Parkway in the Wilshire district of Los Angeles. The scam involves local businessmen, dignitaries and even the police chief. It also involves Monroe and a pop-psychiatrist named Harlan Fontaine and a headstrong member of Phelps and Kelso's unit, corpsman Courtney Sheldon, who is later killed by Fontaine. After a shoot-out at Monroe's mansion by Kelso, it is revealed that the arsonist killed Fontaine and has kidnapped Elsa Lichtmann. It also revealed that the arsonist was Ira Hogeboom, a former flamethrower operator from Phelps' and Kelso's unit, suffering from PTSD and schizophrenia after inadvertently killing a large number of civilians in what was thought to be an enemy encampment at the Battle of Okinawa on (then) Lieutenant Cole Phelps' orders. Hogeboom was being manipulated by Fontaine to torch the matchstick houses to (unbeknownst to Hogeboom) aid the insurance fraud - but after Hogeboom inadvertently incinerates a matchstick house with an entire family inside, Hogeboom goes completely off the rails.
At the Los Angeles River Tunnels, while trying to rescue the kidnapped Elsa, Phelps and Kelso fight their way through corrupt policemen and thugs trying to stop them from exposing the Suburban Redevelopment Fund scam. Outside the tunnels, the Assistant DA blocks the corrupt chief of police from sending additional officers after Phelps, and makes a deal where he sells out the other Fund conspirators. Kelso kills Hogeboom to put him out of his mental anguish and he and Phelps rescue Elsa and flee from the tunnels while struggling against a sewer level that is rising after heavy rain. Eventually, the trio finds an open manhole that they use to get Elsa up to the surface. As the water begins to rise, Phelps voluntarily lifts Kelso to the surface as well; as there is no one else to help Phelps, he says a final goodbye to his comrades as a current sweeps him away, killing him.
Later, a funeral is held for Phelps. Biggs says to Kelso that Phelps was never his friend. Kelso acknowledges that, and says that he was never his enemy. Biggs says that Phelps knew that, as the speech for Phelps finishes. It is revealed during the funeral ceremony that Leland Monroe was brought to justice, but the other SRF conspirators have apparently escaped justice - as they are all present at Phelps' funeral speaking in his honor.
In the epilogue post-credits in a flashback scene Kelso, Sheldon, and their other fellow G.I.'s find surplus morphine on their ship home. Sheldon convinces the others to sell the drugs, making a profit. However, Kelso refuses, telling Sheldon and the others that his respect for them as soldiers will be ceased if they go through with the drug profiting. They do, leading to the events of the movie.
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