...using a proxy server as well? If so, this is a known issue that is fixed in SEP12.1RU1MP1 as below:
LiveUpdate fails to run when SEPM is configured to use a proxy with Windows Authentication
Fix ID: 2579503
Symptom: LiveUpdate fails to run when SEPM is configured to use a proxy with Windows Authentication. The SEPM administrator log displays the message "Return code = 2". The scm-server-0.log contains the following error:
LiveUpdateTask>> CreateProcessAsUser failed with error 2: The system cannot find the file specified.
Solution: SEPM was modified to remove an extraneous double quote in the command line to run LiveUpdate.