Christine Lagarde Financial Investigation: New IMF Chief In No Danger Yet

The IMF chief is being investigated for a controversial payout to a French businessman. Tracy McNicoll reports on why it won't derail her.

Susan Walsh / AP Photos

A French administrative court has decided that Christine Lagarde, the new managing director of the International Monetary Fund, will be formally investigated for her role in a controversial settlement when she was France's finance minister. The news will have some snickering about a curse, with comparisons to her IMF predecessor, fellow French national Dominique Strauss-Kahn, who had to step down after he ran into very sudden legal trouble in May, charged with attempting to rape a hotel maid in New York. Lagarde was chosen to replace him on June 28. But the facts will tend to thin out any possible jokes around the water cooler about French IMF chiefs being cursed.

Lagarde is accused of complicity in the misuse of public funds in the case of a €285 million ($400 million) arbitration payout awarded to Bernard Tapie, a businessman close to President Nicolas Sarkozy. But unlike Strauss-Kahn's show-stopping shocker, the case against Lagarde is anything but sudden. The possibility that a formal inquiry would be launched against her has loomed since before her whirlwind global campaign to win the IMF leadership early this summer. It was already on the table before she visited Brazil, India, China, Saudi Arabia, and Egypt to stump for the job in June and as IMF administrators pondered her candidacy. Yet she beat out Mexican central bank chief Agustin Carstens for the job despite the possible inquiry. Lagarde has always maintained she is “serene” about her role in the affair, and has said would not step down in the event a formal investigation was launched. Now that one has, Lagarde's French lawyer is saying the inquest is “in no way incompatible” with her job at the IMF. Experts say it could take years for French investigators to decide whether or not the case should go to trial.

And to think Lagarde had been attempting, as her biographers tell it, to put an end to a case that had been “poison to French finance ministers for 15 years.” It all began in 1993 when Tapie, a jack-of-all-trades businessman who had also been a cabinet minister in a leftist administration, sold the sporting goods firm Adidas to a consortium led by the Crédit Lyonnais, then a state-owned bank, for €315.5 million. But the following year, Crédit Lyonnais sold the company for more than double the price it had paid Tapie to Adidas' new chairman, Robert Louis-Dreyfus. Feeling swindled, and suspecting that Crédit Lyonnais and Louis-Dreyfus had conspired against him, Tapie sued for damages. The case made its way through the courts for more than a decade, as governments came and went. In 2007, newly named Finance Minister Lagarde called for the case to go to private arbitration. In 2008, the arbitrators found in favor of Tapie, ordering he be paid €285 million in damages plus interest. The decision of whether to appeal or accept the penalty and let the case close came down to Lagarde.

Biographers Cyrille Lachèvre and Marie Visot write in their recent book Christine Lagarde that Lagarde—who made her name as a top-flight corporate lawyer at Baker & McKenzie in Chicago—shut herself away in her office over a full weekend to decide, poring over the Tapie file, consulting lawyers and law professors, before choosing not to appeal. According to Lachèvre and Visot, Lagarde felt that pursuing further legal avenues might only cost the state more money, beyond the €10 million it had already spent in legal fees. The decision was controversial—not least because France and the world were then descending into economic crisis and Tapie had become an open supporter of Sarkozy. Earlier this year, opposition Socialist politicians pushed for the investigation that has now been ordered.

The IMF, and Lagarde herself, would have preferred a different outcome —there was a chance the case would be closed—but this cannot come as a surprise. Now begins months or even years of low-intensity suspense and long, new proceedings. In the meantime, Lagarde may have replaced Strauss-Kahn at the IMF, but he will still rule at the water cooler.