Lagarde to Explain Role in French Legal Case to IMF’s Board

The International Monetary Fund’s board will meet as early as this week to hear Managing Director Christine Lagarde explain her involvement in a French court decision that threatens to tarnish the lender’s reputation.

The fund’s 24 directors are awaiting details from Lagarde, who has now returned from Paris where she was placed under formal investigation for “negligence” in a 2008 decision she made as French finance minister. Lagarde, 58, has denied any wrongdoing. She received public support from the board in previous steps of the legal process.

“I don’t think this is going to trigger any drastic option or reaction by the board any time soon,” said Domenico Lombardi, a former IMF board official. “What is most plausible is that they will want to wait for more elements to come up.”

The board’s meeting is tentatively planned for tomorrow, according to two board officials who asked not to be named because the information isn’t public. IMF spokesman Gerry Rice told reporters today that the meeting take place be “very soon,” declining to give an exact day, with the board expected to release a statement afterward.

The IMF board would only dismiss Lagarde if faced with “substantive and substantial evidence,” said Lombardi, now the director of the global economy program at the Waterloo, Ontario-based Centre for International Governance Innovation. “We do not have that evidence so far.”

Unwanted Attention

The latest development in a court case that’s been going on for more than three years is refocusing unwanted attention on an institution traumatized by the 2011 arrest of Dominique Strauss-Kahn, then managing director, on charges including the attempted rape of a hotel maid. Lagarde replaced him, the charges were later dropped, and he settled the maid’s lawsuit in 2012.

“It doesn’t help the fund’s reputation after what happened in the recent past to have now another managing director under formal investigation,” Paulo Nogueira Batista, an executive director representing Brazil and 10 other countries at the executive board, said in a telephone interview yesterday. “We need to know what this means, in terms of, for instance, her capacity to carry out her duties as managing director, the reputational implications for the fund.”

Excluding Strauss-Kahn, Lagarde’s legal case has no known precedent among her predecessors, Rice said.

In 2008, Lagarde decided to allow an arbitration process to end a dispute between Bernard Tapie, a businessman and supporter of then French President Nicolas Sarkozy, and former state-owned bank Credit Lyonnais. The court has been looking into whether she erred in agreeing to the arbitration, which resulted in the business tycoon being awarded about $500 million.

More Serious

The decision by the Cour de Justice de la Republique to put her under formal investigation, 15 months after naming her a material witness, indicates the case has taken a more serious turn, said Nicolas Veron, a visiting fellow at the Washington-based Peterson Institute for International Economics.

“It’s bad news for the IMF since it was not expected, but public information available at this stage doesn’t necessarily point to a need for her to step down,” he said.

Lagarde faces a rarely used minor charge of negligence in the use of public funds in the criminal case, which carries a maximum penalty of one year in prison and a fine of 15,000 euros ($19,800), according to Stephane Bonifassi, a lawyer at Lebray & Associes in Paris, which is not involved in the case.

There’s no time limit for the court to decide on taking the case to trial and it may continue “for a fairly long time,” he said.

Lagarde said she has instructed her lawyer to appeal the decision, “which I consider totally without merit.”

Sole Allegation

“After three years of procedure, the sole surviving allegation is that through inadvertence or inattention I may have failed to intervene to block the arbitration that brought to an end the longstanding Tapie litigation,” she said in a statement through her lawyer yesterday.

Separately, Orange SA Chief Executive Officer Stephane Richard, who was Lagarde’s chief of staff at the French finance ministry during the Tapie arbitration decision, was put under formal investigation in the case last year. Richard, 53, who retained his top spot at the French phone company, was offered another term by the carrier’s board this year.

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