The owners of Latin Investment Corp., the District firm that served thousands of Hispanic residents, used $1.2 million of depositors' money to buy themselves houses and support their other businesses, the Securities and Exchange Commission said yesterday.

The owners of Latin Investment borrowed the money while the firm was losing $500,000 a year, according to court documents. The owners never repaid the loans, the SEC said in its complaint, which persuaded U.S. District Judge Gerhard A. Gesell to freeze the personal assets of Latin Investment's owners.

While Latin Investment's president, Fernando Leonzo, had assured customers that their money was "safely invested in real estate," yesterday's filing by the SEC was the first indication that much of it was used for personal purposes.

According to the SEC, Leonzo borrowed $300,000 from Latin Investment. Leonzo's associates, Vice President Jose A. Cortes and Secretary Leonel Salinas, borrowed a total of $109,000 for down payments on their Virginia houses.

The officers also borrowed more than $800,000 in depositors' money to finance five businesses in the United States and two firms in El Salvador, accountant Alonso Montalvo told the SEC.

The Adams-Morgan firm catered to the Spanish-speaking community. Undocumented immigrants often used Latin Investment's services because it did not require formal identification for opening accounts. Many depositors entrusted their life savings to Latin Investment in the belief that it was a federally insured, fully chartered bank.

After Latin Investment closed Nov. 29 amid financial difficulties, it became clear to the customers that it was not a legal banking operation, which requires a charter. The customers, now estimated by the SEC to number 3,500, also learned that for more than two years, six federal and local agencies had looked into Latin Investment's activities, but had never shut the firm down.

The customers, mostly Salvadorans, forced the firm into bankruptcy Dec. 13 to try to recover their deposits. The SEC estimated yesterday that $6.8 million was on deposit in the months before Latin Investment shut its doors.

Although the bankruptcy proceeding froze the assets of the firm, it did not address the assets of Latin Investment's owners. In its complaint, the SEC charged that because depositors' money was used for personal gain, the depositors are entitled to the owners' assets as well.

Gesell's action yesterday freezes the officers' personal assets and forbids each from diverting money locally or transferring money internationally. Gesell rejected, however, a request that the three officers provide the SEC with an accounting of all their personal holdings.

The attorneys representing the depositors, Brian Leitch of Arnold & Porter and Richard Deering, a Virginia-based lawyer, hailed the move by the SEC, which began a formal investigation into the case after the firm closed.

SEC Chairman Richard Breeden said yesterday that his "basic intention is to get all of the assets {of Latin Investment} and return them to the people who've been defrauded."

Breeden said the commission is working with the Salvadoran government to recover any depositors' money invested in El Salvador.

He said the SEC hopes to work with the bankruptcy trustee to ensure that depositors get what they are owed.The SEC plans to pursue civil actions against Leonzo and his associates on grounds that they violated securities laws, SEC officials said. By issuing passbooks to depositors, the SEC said, Latin Investment was actually issuing unregistered securities. The firm failed to disclose material information about those securities to depositors, the SEC said.

Yesterday, a spokesman with the U.S. Trustees Office, a branch of bankruptcy court, confirmed that Murray Drabkin, a bankruptcy lawyer, has agreed to act as trustee beginning Dec. 31.

The SEC was the first government agency to become aware that Latin Investment was offering banking services without permission. In 1987, the commission alerted the D.C. Office of Banking and Financial Institutions, which tried to get the owners to apply for a charter.

SEC officials said yesterday that they were in contact with the banking office throughout 1988 and 1989, and were assured that the office was pursuing the matter.

"We told them, 'Let us know if you're going to pursue this, because if you're not, we would like to,' " said Harry Weiss, associate director of SEC enforcement.

Breeden said he first became aware that the District government had never taken action against the firm when news broke that Latin Investment had closed.

Latin Investment's accountant told the SEC that Leonzo and his partners used $800,000 of the firm's money to fund other business ventures, including Atlantic Coast Construction, which is now out of business, Abel Concrete, Latin Credit Corp., L&L Construction and L&L Partnership, all in the Washington area.

In El Salvador, loans from Latin Investment helped finance a propane gas distribution company called Latinos S.A., as well as a restaurant called Tuco & Tico, Montalvo said.

Montalvo told the SEC that for the last two years he had repeatedly warned Leonzo, Cortes and Salinas that Latin Investment was going bankrupt. Yet, Leonzo and his associates continued to tell customers that their money was safe and continued to accept deposits, SEC documents show.

Although Latin Investment was earning $400,000 a year from its investments and fees charged to depositors, it was paying out $490,000 in interest to depositors and had expenses of more than $400,000 including salaries to its owners and three employees totaling $150,000, Montalvo said.

Although each of the officers received a modest $23,000-a-year salary, they received other benefits through the Latin Investment loans. For example, Leonzo received another annual salary of $25,000 a year and the use of a company car from L&L Construction, which was funded largely by Latin Investment loans, according to SEC documents.

L&L Construction, which is still operating, has been delinquent in paying back the $500,000 it owes Latin Investment, Montalvo said.

Montalvo told the SEC that there were many times when Latin Investment ran out of cash. For example, one day in December 1988, Latin Investment had a cash shortage of $51,000.

"When I informed Leonzo, Salinas and Cortes of this problem, they refused to take action," Montalvo said.

He said the firm didn't even have an accounting system until he joined the company.

Leonzo and Cortes were in court yesterday, but declined to comment after the one-hour hearing. Salinas is in El Salvador and is expected to return to this country Thursday, the court documents said.

The SEC has scheduled a court hearing on the merits of its case against Latin Investment Jan. 14.