A Montgomery County grand jury cleared former Montgomery County police chief Robert J. diGrazia yesterday of allegations that he had mismanaged his department.

Concluding a five-month investigation, the grand jury issued a brief report saying it decided against seeking indictments based on "counseling" it received from the Maryland special prosecutor's office.

The grand jury had been working under the direction of the special prosecutor after Montgomery County State's Attorney Andrew L. Sonner advised the grand jurors that there was insufficient evidence of criminal wrongdoing to warrant an investigation.

According to a source familiar with the investigation, the assistant special prosecutor, Neal Janey, who worked with the Montgomery grand jury "had even a more negative opinion" of the merits of the allegations of mismanagement than Sonner had.

Among the allegations the grand jury investigated were charges that money for officers' travel and training was wrongly spent, contracts for special consultants were improperly awarded, and a departmental petty cash fund used by the chief and his assistant, Philip H. Marks, was improperly accounted for.

The allegations were made by Code 3 and widely reported in area newspapers. Code 3, which takes its name from a police code meaning a "serious crime in progress," has two publicly identified members and the group refuses to give out any information about other membership.

DiGrazia, who was fired last December by County Executive Charles Gilchrist, maintained that Code 3 was supported by "disgruntled" officers who opposed the changes he was trying to make in the department.

Margaret Jacocks, the county police officer's wife who heads Code 3, did not comment on the grand jury's report, but referred calls to the organization's attorney, Richard L. Bricken, who said Code 3 sticks by the allegations it made.

Bricken said, however, that the grand jury report left "a big question mark" since it did not elaborate on the counseling it received from the special prosecutors' office that led to the decision to return no indictments.

He said that Jacocks, who was once fired from the police department, never testified before the grand jury, was never subpoenaed, and never formally turned over Code 3's allegations to the grand jury.

He said it was Code 3's intention solely to have the County Council's office of legislative oversight investigate its charges to determine if any improprieties had occurred.

A Council staff member reviewed the allegations and the police department's response to them, and concluded that there was no reason for a further investigation. The council did find some 'minor infractions" of administrative procedures.

Code 3 also charged that under diGrazia, violent crime in the county increased, police officers had insufficient back-up from other officers on serious calls, police radios failed to work and that there were insufficient patrol officers on the streets.

Code 3 has been silent since diGrazia was fired and Bricken said it is because the organization feels the present police administration under Acting Chief Donald. Brooks shares the same priorities as Code 3.

DiGrazia said last October that his efforts to clear himself of the Code 3 allegations had virtually "paralyzed" his administration and that the department spent about $30,000 in manpower trying to respond to the charges.

In an unusual move last September, the grand jury, after finishing its regular session, asked that its term be extended because it wanted to look into allegations concerning the police department. At first, Sonner refused to petition the court so that grand jury could be extended. The grand jury then contacted Special Prosecutor Gerald Glass and Glass persuaded Sonner to seek the extension.

DiGrazia was in Miami, Fla., yesterday on business and could not be reached for comment. His attorney, Peter Davis, declined to comment on the grand jury report.

DiGrazia's former aide, Philip Marks, whose name had been associated with the Code 3 allegations, charged yesterday that Jacocks "made wild accusations which may hve libeled and slandered people." He said he intends to speak to his attorney about a lawsuit against the organization.

"The grand jury could have done one of two other things: it could have indicted people or it could have written a negative report. It did neither because there wasn't any [wrongdoing] there," said Marks, who had received a letter from Glass stating that he was not the target of the grand jury's investigation.