SEC Investigates Charges Against Smith Barney : Securities: A former manager claims the brokerage, which has launched its own probe, duped L.A. County of $1.3 million.

The Securities and Exchange Commission has opened a formal investigation into allegations that the giant Wall Street brokerage firm Smith Barney duped Los Angeles County on a complicated 1993 bond deal and may have cost the county as much as $1.3 million, county officials confirmed Thursday.

Investigators with the SEC’s division of enforcement notified county officials last week that they want to review documents relating to the deal and will be requesting interviews with employees involved in the transaction, said Mark Saladino, principal deputy in the county counsel’s office.

Saladino said the SEC did not disclose the scope of its inquiry or which specific laws might have been violated.

“They didn’t say what exactly they wanted, so I assume they are still formulating their request,” Saladino said. “But we have told them that we will comply fully with whatever requests are made.”

The allegations were made by Michael R. Lissack, a former managing director in Smith Barney’s municipal finance department, who has charged that the firm secretly pocketed a $1.3-million fee on the deal that otherwise would have gone to county coffers.

Smith Barney had acted as the county’s representative on the deal, but it allegedly received the fee from AIG Financial Products, a firm Smith Barney brought in to refinance $461 million worth of pension obligation bonds. The complicated transaction was designed to yield a $20-million infusion of cash for the financially strapped county.

Lissack charges that the county’s take would have been more had Smith Barney not reneged on a promise not to accept a fee on the deal.

Smith Barney has denied it broke its agreement, but it said two weeks ago that it had launched its own investigation of the allegations.

Smith Barney spokesman Robert Connor said Thursday that he was not aware that the SEC had launched a formal investigation. However, he said that when Smith Barney first learned of Lissack’s allegations, it notified both the county and the SEC. “Because we did inform the SEC, we expected them to look into the matter,” Connor said.

County officials have spoken with Smith Barney and AIG officials and say they are satisfied that both firms are being truthful.

“We have no evidence, independent of what Lissack has said, they have lied,” Saladino said.

Smith Barney has hired an outside law firm to look into Lissack’s allegations. The brokerage said in a statement two weeks ago that if it found evidence of an improper payment, it “will work with the county to address what remedial action, if any, is appropriate.”

Officials at AIG headquarters in New York did not immediately respond late Thursday to a telephone message seeking comment. Two weeks ago, a spokesman for the large insurance holding company declined to answer any questions about the Los Angeles County deal.