The U.S. attorney and the D.C. police department's internal affairs unit are investigating alleged mismanagement of the $300,000 confidential fund used to finance the district's most secret undercover police operations.

According to knowledgeable officials, investigators are trying to determine if the fund has been used improperly for personal loans that have since been repaid and if the department paid unnecessarily high prices for 14 undercover cars purchased for $27,000 through a local used car dealer.

The confidential fund was established to ensure a ready supply of cash necessary for some ongoing criminal investigations, to be used for such things as paying informants, making undercover narcotics "buys" and purchasing cars or other equipment that for security reasons should not be traced to the department.

Capt. Sammie Morrison, the official in charge of the fund, strongly denied that there has been any misuse of the money. He says there have been no personal loans from the fund and that the department paid a fair price for the cars. He says there have been some record-keeping procedures that may make it impossible to account for all expenditures from the fund.

Morrison says he usually keeps between $30,000 and $50,000 in cash bundles in a locked vault in his office. Almost all the receipts in his safe do not state the specific reason the cash was dispersed, he says, stating only that the money was spent for "the detection of crime." And in some cases, Morrison says, the original receipts were removed from the safe when the money was repaid, leaving no record that the money had ever been used.

Because of the absence of these records, officials said, it may be difficult to establish if there was any mismanagement.

According to Morrison, who reports directly to D.C. Police Chief Maurice T. Turner Jr., there is a periodic accounting of the fund by the city's inspector general's office and the department's field inspections bureau. Neither agency, however, examines the specific reasons for each expenditure.

Turner, who is not involved in the daily operations of the fund, said in an interview last week that he believes the investigation will show the fund has been handled properly. Turner said that to his knowledge there has been no money borrowed from the fund for personal reasons, and declined to comment on the allegations involving the purchase of the cars until the investigation is completed.

Morrison said he personally audits the fund by regularly checking the receipts against the money on hand and occasionally contacting the units that requested the money. Earlier this year, Morrison said, he discovered a $50 accounting discrepancy and reimbursed the fund with $50 out of his own pocket.

Morrison says he recently has instituted new and stricter policies regarding access to and use of the fund, not because of the probe but for reasons of efficiency. He has created a separate fund for travel advances, he says, and all expenditures from the confidential fund will be recorded in a ledger in the safe, even if the original receipt is destroyed.

Morrison says he also has obtained a new safe that has three separate combination locks. Morrison says he no longer has direct access to the cash, but knows only the combination that leads to the compartment in which the receipts are stored. The cash is contained in two smaller locked compartments within the safe. Access to the cash is now limited to two of Morrison's assistants, each of whom knows the combination to one of the two compartments.

The federal probe originally focused on Morrison's purchase of the 14 undercover cars and then expanded to include allegations of personal borrowing by at least one official. Further details regarding these latter allegations could not be learned.

The undercover cars were to be used in several sensitive investigations, including the special "Copperjacket" task force, a group of detectives who were investigating more than 25 narcotics-related slayings in the city, according to law enforcement sources.

Morrison says he used money from the confidential fund instead of normal procurement procedures to keep the purchase of the cars a secret, even from others in the police department.

Morrison says he decided to buy three used cars from a minority contractor named William Melby, a local used car dealer and repair shop owner who earlier was introduced to him by Chief Turner.

In September 1981, Morrison says, he disclosed to Melby that the three cars would be used for undercover investigations. He said he picked out two cars at Melby's auto repair garage, and through Melby bought a third car that had been purchased from another dealer. Morrison said the police department paid Melby the going retail price for all three cars.

A few months later, Morrison again bought cars through Melby.

Morrison says Melby took him to Bo's Auto Sales in Beltsville. Morrison, who was in his police uniform, introduced himself to the owner, Carvel R. Sanders. Then Morrison picked out six cars and waited in the lot while Melby bargained for a price. Morrison says he gave Melby $7,330 from the confidential fund, approximately the going retail rate for the cars. Sanders says through his attorney, Thomas P. O'Reilly, that he sold the cars to Melby at a lower wholesale price, but that he doesn't recall the exact amount he charged.

A couple of months later, Morrison says, he paid Melby another $16,250 in confidential funds for five more cars obtained from various used car lots that were not minority-owned. Some of these transactions again involved Sanders, who also was aware the cars were being sold to the police department.

Morrison says he gave Melby cash from the fund for the final 11 cars and then submitted two vouchers for the total amount to the department. When he received checks made out to Melby from the department, Morrison says, an assistant took the checks to Melby and waited while Melby cashed them and handed the money back. That way, Morrison says, the fund was reimbursed, the department got the cars quickly and his office got credit for doing a percentage of its business with a minority-owned firm.

Melby, who has appeared before a federal grand jury investigating the car purchases, declined comment on the transactions. Melby's attorney, William Thornton, said, "Mr. Melby has done nothing wrong."

Morrison says the prices the police department paid Melby for the cars were at or below the suggested retail prices for similar used cars--and that dealing with Melby was the fastest way to get the cars the department needed.