Back at Club Palermo, Vettori and his gang make plans to rob Lorch's Bronze Peacock gambling club at midnight on New Year's Eve. Rico derides frightened henchman Tony: "You're yella, you dirty..." Then, he brags about the loyalty of his friend Joe who works in the club, calling him "the best front man in the world" and an excellent inside source of information for the robbery: "Without Joe, we can't pull this job..." In a contest of wills, Vettori challenges Rico's authority in planning the heist: "And until I say different, nobody's gonna plan for this mob but me. Ya get me?"

Soon after, Rico chides Joe on his new-found dancing career - resentful of Joe's success. He forces Joe to help the gang enact the robbery, but Joe refuses to cooperate. Reluctant to help them rob his place of employment, he begs: "You gotta get me out of this, Rico...You gotta. I don't wanna...Don't you see, I'm-I'm workin' steady now..." But Rico snarls back and won't accept his answer: "You're gonna be in on this and you'll like it!"

The robbery is planned to occur during New Years' Eve celebrations at the club. One of the guests is the crime commissioner, McClure, who is disgusted to learn that the club is financially backed by gangster Arnie Lorch. Having come to the club "under a misapprehension," McClure decides to leave with his party guests. During the heist at midnight while the boozing, wealthy patrons are distracted, the gang robs the nightclub and the customers, and Rico rashly shoots McClure (unnecessarily) as he is departing. The montage sequence of the Bronze Peacock robbery is presented with dissolves, quick action shots, and views of gangsters' legs from the waist down.

In the getaway car driven by nervous gang member Tony, Rico slaps him when the car won't start. After the robbery, Joe returns to Olga and tells her how terribly worried he is about the consequences of McClure's death. Olga begs him to break free of the gang: "You're through with that bunch - oh, you don't belong, Joe. You're not that kind," but Joe feels loyalty to his gang: "You can't go back on the gang."

Having proven himself fearless, Rico boasts about killing McClure to Vettori in his office: "Do you think I'm gonna let a guy pull a gun on me?" Sam Vettori paces the floor with worry: "What a fine pickle we're in! You and that rod of yours!" While Vettori calmly plays solitaire, Sergeant Tom Flaherty (Thomas Jackson) appears with two dicks from the police force to question him about the stolen getaway vehicle from the robbery out in the street. Learning about McClure's death, Vettori responds: "Some guy that's sure careless with the lead, all right." Calmly and patiently, a pallid-faced, vulturous-looking Flaherty leaves, waiting knowingly until he can catch his prey in his war on crime.

Rico becomes bolder and braver after the murder, telling Vettori: "I've been takin' orders from you too long." The members of the gang begin shifting their allegiance to Rico, and he soon takes over as boss of the gang. He fearlessly and incisively humiliates Sam in front of the others with an ultimatum:

Sam! You can dish it out, but you're gettin' so you can't take it no more. You're through.

And then Rico reiterates his distrust and fear that one of the gangsters may turn 'yella':

There's a rope around my neck right now and they only hang ya once. If anybody turns yella and squeals, my gun's gonna speak its piece.

In a cliched scene typical of gangster films, Tony's poor but honest Italian mother wants her nerve-wracked, guilt-ridden son to go straight:

Why you don't sleep? You sick maybe. Huh?...You stay out late nights. You drink a lot of wine...Oh listen, Antonio, I...I have some spaghetti for you on the stove. If you feel better, eat some, yeah? It do you good. You used to be a good boy, Antonio. Remember when you sing in the church, in the choir with Father McNeill. You in white. Remember?...The church was beautiful. You a little boy with long hair. The tall big candles, flowers. Remember Antonio?

Tony decides to walk briskly to Father McNeill's church, to confess his guilt and repent his involvement in McClure's killing. Enroute, he confronts Otero, one of Rico's new admirers/confidants who realizes that Tony has 'lost his nerve' and may 'turn yella.' Loyal and admiring toward Rico, Otero solicitously rushes back to tell Rico during his dinner that Tony may be "crazy, crazy" and may possibly betray the mob.

In one of the more powerful moments in the film, Rico swiftly dashes from his dinner table and, with Otero, drives up in a black roadster just as Tony climbs up the steps of the church in the snow. Three shots are fired - and Tony is silently gunned down. His body rolls down the steps. He is given an heroic gangster's funeral, as Italian melodies play on the sound track during the procession: "Tony deserved a swell send-off. Poor kid." During the funeral, Rico notices Flaherty once again on the sidelines watching the gangster-filled hearses drive by, but Rico doesn't want the deathly apparition to disturb him: "He's just stallin'. He ain't got a thing on me." Then, the insensitive, fidgety killer complains that the funeral cortege is moving too slowly: "Gee, we're movin' slow."

That evening, Rico is honored at a testimonial dinner/banquet held at the Palermo Club for him by Sam Vettori. [The scene was modeled on a real-life event - a party in honor of two gangsters, Dion 'Deanie' O'Bannion and Samuel J. 'Nails' Morton.] The outside of the printed program features the words "Friendship" and "Loyalty" and two turtledoves. Inside is a picture of Rico with a derby hat resting uncomfortably on his head and a box which reads: "Compliments to a True Pal, Mr. C. Bandello, from a True Pal, Mr. Sam Vettori." The noisy, uncouth and crude mobsters reflect their classless and tasteless upbringing by staging a minor food fight, and then "the boys" present Rico - "a great guy" - with a gold watch (which turns out to be stolen). The guests are prompted to clap on cue, and not out of genuine appreciation or regard for Rico. When forced to his feet to give an acceptance speech, Rico lacks poise and expresses himself with empty words and a halting delivery:

All right, you birds want me to make a speech? Here it goes. I, uh, I want to thank you fellas for this here banquet. It sure is swell. The, uh, liquor is good, so they tell me. But I don't drink it myself. And the food ought to leave nothin' to be desired. And I guess we're all havin' a swell time. And it sure is good to see all you gents with your molls here. Yeah, well, uh, I guess that's about all. (Applause) Yeah, only I wish you birds wouldn't get drunk and raise a lot of Cain, because that's the way a lot of birds get bumped off. Aw, come on, lay off that stuff...!

Obviously, Rico is an unhappy and joyless man (and slightly moralistic), taking pleasure not in drinking or women, but only in his stubborn and ruthless rise to power. He vainly agrees to have his picture taken by newspaper photographers (he reflexively combs his hair), and then insists that Diamond Pete be in the picture with him, but the older and wiser gangster refuses: "I haven't had my picture taken in the last fifteen years." Rico and Sam grin like idiots and hold their pose for the photographers. Rico carelessly disregards the negative notoriety he will engender with published pictures: "What do I care when I want folks to see what the boys think of me." Distracted by his new position, the banquet, other rivals and duties, Rico is reminded that Joe isn't present to honor him and he appears disturbed: "He didn't come. He ain't been around in a long time." But then Rico defends his old friend's loyalty to him: "Bad business to quit on me, Sam. One guy tried that on me once. Now you mind your own business and let me tend to my own."

At the end of the banquet, Flaherty arrives to pay a visit, and Rico is incensed to see him at their private party:

Rico: What does that bull want in here? I'll show him where he gets off. (To Flaherty) ...Who invited you here?
Flaherty: You're getting up in the world, aren't you, Rico?
Rico: The downstairs is open to anybody, even cops, but the upstairs is private.
Flaherty: Thanks, but I like to keep my eye on you, Rico. You see, I'm your friend. I like to see a young fellow getting up in the world. That's all. So long.

In their parting words, Rico is informed of a recent robbery involving a diamond and platinum watch, and he quickly thinks of his gift watch - obviously stolen by his fellow gangsters. A closeup of Rico nervously fingering the watch in his hand closes the scene.

The next day, the newspapers carry a front page story and photograph of the banquet: "'LITTLE CAESAR' BANDELLO GIVEN TESTIMONIAL BY FOLLOWERS." In the Bronze Peacock Club, Joe overhears Arnie Lorch talking about plans to have the ambitious Rico killed by his henchmen: "I'm saying he's got to stop so he's going to stop. He's been cuttin' in on my territory and that's all wet with me....a couple of my boys ain't sittin' here. They're out looking for Rico, and they've got their guns with them too. Catch on? And when they find him, it won't be no banquet that Rico gets. It will be a wake." Joe immediately telephones Otero to warn Rico of Arnie's threat on his pal's life: "This is hot. Tell Rico to look out. Little Arnie's gang's after him. They're gonna put one in him."

Rico is obsessed with his celebrity status and purchases ten copies of the newspaper at a sidewalk news-stand so that he can admire his picture on the front page. Making himself an easy target in his new, expensive coat, Rico openly and foolishly strolls down the street with the ten papers under his arm. A speeding milk/dairy van passes by after he has pulled out his watch and admired it with a smile A machine gun fires on him and wounds him in the arm. Grabbing his arm as he lays on the sidewalk, Rico contemptuously shouts out toward the truck, to reflect his defiance and sense of invincibility: "Fine shots you are!"

Flaherty is there again to offer his own brand of caustic, gallows humor, but Rico refuses to play into his hand:

Flaherty: So somebody finally put one in you.
Rico: Yeah, but they just grazed me, though.
Flaherty: The old man will be glad to hear it. He takes such an interest in you.
Rico: Are you telling me the cops couldn't get me no other way, so they hired a couple of gunmen?
Flaherty: If I wasn't on the force, I'd have done the job cheap...I've been in this game a good many years, and I put the cuffs on a lot of mugs. Some day, you and I are gonna take a ride, Rico. And when we do, I'll have the cuffs on you too.
Rico: No buzzard like you would ever put any cuffs on Rico.
Flaherty (after Rico departs): I'm gonna get that swell-headed mug if it's the last thing I ever do.

While Rico's arm is being bandaged, he is told that Joe called to save his life. He thinks twice about his old friend's loyalty and how he has remained outside his influence: "I didn't think he cared enough." Rico considers giving Joe "a chance" on his next job. Grabbing for his comb to pull through his hair, Rico proposes that the gang's next target is Arnie.

At E. N. Carr & Co. Importers and Exporters, Rico's gang makes its way into the inner sanctum where Arnie is found with two gang members. Rico imposes on Arnie's two associates: "You guys are invited to this private party," and then he explains his distaste for Arnie's machine gunners with words that he had earlier forced upon Vettori:

You ought to have better sense than to hire a couple of outside yaps, especially bad shots...Arnie, you're through! You hired these mugs. They missed. Now you're through. If you ain't out of town by tomorrow morning, you won't ever leave it except in a pine box. I'm takin' over this territory. From now on, it's mine...Arnie, you'd better quit this racket. You can dish it out, but you've got so that you can't take it no more.

A gossip entry in the "Society Section" of the next day's newspaper, written by one of Rico's gang members, announces Arnie Lorch's departure from town - the result of Rico persuading him to return to Detroit:

Mr. Arnold Lorch, of the North Side, has just left for Detroit where he intends to spend the summer. He was accompanied by two of his Detroit friends, who have been in this city for a short stay.

Joe reads the column, and comments to DeVoss about his new boss: "That means you have a new partner, Little Caesar." On a street corner, Flaherty cracks a smile when he reads the news, but then his face hardens as he looks up.

Rico recuperates in bed, his back against the bedpost. Otero glows at him about how successful his boss has become, and then fawns at him: "You gave Arnie an awful wallopin'. Rico, now you're famous!" Rico reduces everything that has happened to him with a boast:

You see, Otero. There's no use in being scared of any of these big guys. The bigger they come, the harder they fall. Yeah, I ain't doin' so bad in this business so far. (He adjusts his tie)

In the next scene, Rico stands on a table looking into a full-length mirror, as Otero supervises his boss' fitting of a tuxedo for an upcoming meeting with the Big Boy. [Symbolically, Rico is a little man who has grown too quickly out of his own league - a minor crook who has ascended from the gutter too ambitiously.] From below, an assured Otero supports Rico on his classy appearance:

Otero: You look great, boss.
Rico: Yeah, but it feels terrible.
Otero: Aw, you're getting up in the world, Rico.

The scene of Rico's meeting with Big Boy is comical but complex, illustrating Rico's discomfort with opulence. In the ostentatious, exquisitely-furnished mansion of the Big Boy, Rico arrives (first fumbling uneasily with the butler) and meets with the cultured, high-society tycoon "Big Boy" (Sidney Blackmer) who pulls all the underworld strings of the city (and its gangsters). Big Boy quickly remarks on Rico's style:

Big Boy: Wow! You're rather lit up tonight, aren't you?
Rico: Yeah, I-I thought I'd better put on a monkey suit...Well, some joint ya got here.

Being naively limited and vulgar, Rico is immediately impressed with the elegant surroundings and Big Boy's style of living, his ornately-carved desk and a wall painting. Taken in by all the trappings of wealth, Rico doesn't realize that he is being expertly manipulated by Big Boy's flattery and excess. Ignorantly, Rico misconceives the value of the wall painting, incorrectly assuming that its value is in the gold frame: "Fifteen thou..., boy, them gold frames sure cost plenty of dough." He accepts the offer of a cigar, spits out its tip, and then flicks burnt ashes on the rug. When he sits on an expensive chair, he only perches on its front edge, while Big Boy sits above him on the edge of his desk [a pose similar to an earlier image of Rico delivering an ultimatum to Sam Vettori]. After offering Rico cocktails or a dash of brandy (both of which he refuses), Big Boy presents Rico with secret "inside dope" on the new regime (and "new boss") on the North Side of the city:

Big Boy: All right. Get this. Pete Montana's through.
Rico: Yeah? Well. And I thought he was such a big guy.
Big Boy: He's through. Suppose I were to tell you that from now on, you were Pete Montana. That you were to take over his territory in addition to your own. Would you shake on it?
Rico (overwhelmed): Would I? Would I? (They seal the deal with a firm handshake)