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Lagarde Hearing in Sarkozy-Ally Probe Enters 2nd Day

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(Corrects to add the word ‘attempted’ in ninth paragraph.)

May 24 (Bloomberg) -- International Monetary Fund Managing Director Christine Lagarde began testifying for a second day at a Paris court investigating her decision to allow an arbitration that benefited a supporter of former President Nicolas Sarkozy.

Lagarde, who was finance minister under Sarkozy and has denied any wrongdoing, arrived for the questioning at 8:15 a.m. local time today. The Cour de Justice de la Republique, which focuses on ministers’ actions in office, is looking into whether she erred in agreeing to an arbitration to end a dispute involving business tycoon Bernard Tapie that awarded him about $500 million.

After the interrogation, Lagarde, a lawyer by training, may be placed under formal investigation, the French equivalent of being charged, or under a lesser status. It’ll be up to the IMF board to reaffirm its support for her at a time when the fund is grappling with a recession in the euro area, four bailouts in the region, drawn-out Egyptian aid talks and emerging countries’ plans to create their own development banks.

“This is the worst possible time for Lagarde to have to cope with events back home,” said Martin Edwards, an associate professor at Seton Hall University’s John C. Whitehead School of Diplomacy and International Relations in South Orange, New Jersey. “She needs to be out front now more than ever.”

The IMF board “continues to express its confidence in the managing director’s ability to effectively carry out her duties,” the fund’s spokesman Gerry Rice told reporters in Washington yesterday.

Waived Immunity

“The IMF’s executive board some time ago waived the managing director’s immunities to the extent necessary to enable her to appear before the French judicial authorities,” he said, adding that Lagarde had requested it.

He declined to address the impact of the case on the IMF’s reputation.

“There’s a process under way in France, so let’s wait for that,” he said.

Lagarde isn’t the first IMF chief to face legal difficulties. She took over the Washington-based fund as the institution was reeling from the arrest of Dominique Strauss-Kahn on charges including the attempted rape of a hotel maid in New York. The charges were later dropped and he settled the maid’s lawsuit last year.

His predecessor, Rodrigo Rato, was last year named an official suspect in the Spanish national court’s investigation of alleged fraud related to the collapse of Bankia SA, where the former IMF head resigned as chairman a year ago. Rato has denied the allegations.

Tapie Case

Meanwhile, under French law, none of the outcomes of the Lagarde hearings that began yesterday presumes that she will stand trial when the investigation ends.

Businessman Tapie, who has also dabbled in politics and acting, in 2008 won a 385 million-euro ($495 million) arbitration award to settle a dispute over his company’s sale of German sportswear brand Adidas AG.

He contended that Credit Lyonnais mishandled the 1993 sale and pursued a claim against the formerly state-owned bank’s liquidator.

Tapie, a minister for less than a year under former Socialist President Francois Mitterrand in the 1990s, endorsed Sarkozy’s successful presidential effort in 2007 and failed re-election bid in 2012.

Lagarde’s Stand

The arbitration court awarded Tapie 45 million euros in damages on top of 240 million euros for his creditors and about 100 million euros in interest. Lagarde refused to appeal the decision, saying “a very large majority” of the money would return to the state through the creditors’ claims.

The court opened its investigation into whether there was “complicity in forgery” or “complicity in misuse of public funds” in the case in 2011, soon after Lagarde became IMF head.

“There is nothing new under the sun,” Lagarde told journalists last month in Washington. “Ever since 2011 I have known very well that I would be heard by the investigating commission of the Cour de Justice.”

Tapie sought to distance himself from Lagarde and her hearing, saying yesterday in a Europe 1 radio interview that she “wasn’t very nice to me” and that the case against her “doesn’t concern me at all.”

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Gregory Viscusi at gviscusi@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net Chris Wellisz at cwellisz@bloomberg.net

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