'Christine Lagarde, head of the International Monetary Fund, has been placed under formal investigation by a French court on suspicion of negligence in a political scandal that dates from her time as finance minister under former president Nicolas Sarkozy.

The Cour de Justice de la République move, which followed 15 hours of questioning on Tuesday, draws Ms Lagarde deeper into an investigation that could yet run for several years and is an embarrassment for such a highly regarded international figure.

It also risks embarrassing France, just three years after the resignation of Dominique Strauss-Kahn as IMF chief following allegations that the French former finance minister and then presidential hopeful had sexually assaulted a hotel employee.

The Lagarde case stems from allegations that an arbitration process that awarded €403m in 2008 to businessman Bernard Tapie to settle a commercial dispute with the state was rigged because he supported Mr Sarkozy in the 2007 presidential election.

Ms Lagarde has always protested her innocence, denying any improper role in the arbitration process, which she says was independent and in the best interests of taxpayers.

In a statement on Wednesday, she said that she had instructed her lawyer to appeal against the decision to place her under investigation, which was “without merit”.

“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,” Ms Lagarde said.

Her spokesman told the Financial Times that Ms Lagarde would not resign from her position at the IMF, whose board had so far supported her.

Ms Lagarde flew back to Washington on Wednesday and is likely to brief the IMF’s executive board before the end of the week.

People close to the board said they would wait for legal advice, but on the face of it, the formal investigation into relatively minor allegations is unlikely to affect her leadership. After previous hearings, the board has “reaffirmed its confidence” in Ms Lagarde.

The board is getting legal advice from the IMF’s internal counsel while Ms Lagarde has retained her own lawyers.

Ms Lagarde’s spokesman said that the charge of negligence was relatively minor, but one that nevertheless carried a maximum penalty of one year in prison and a fine of €15,000 if convicted.

Being placed under formal investigation signals that the court believes there is evidence of a crime but does not always lead to charges being brought.

The so-called “Affaire Tapie” has enmeshed several other high-profile figures in French politics, including Mr Sarkozy’s former chief of staff, and Stéphane Richard, Ms Lagarde’s former chief of staff at the finance ministry and now chief executive of Orange, France’s leading mobile phone network operator.

Mr Richard and others are being investigated by a separate court as part of a parallel probe.

Christopher Baker, a member of Ms Lagarde’s legal team, said the commission of the court had six months to study her appeal.

He said that if the appeal was rejected, Ms Lagarde would then take her case to France’s Cour de Cassation, the country’s highest judicial authority, which would be likely to take at least another year to reach a conclusion.

“We will fight this decision,” Mr Baker said. “And we will fight for a couple of years.”

He added that the next stages would not be a tax on Ms Lagarde’s time as it would be handled by lawyers. “The next two years will be a legal procedure in which Ms Lagarde’s personal involvement will not be required,” he said.

The case centres on investigations into suspicions of organised fraud linked to the €403m that the French state awarded Mr Tapie to end a dispute dating back to the 1990s. Mr Tapie alleged that he was defrauded by Crédit Lyonnais, the now defunct bank, over the sale of the sports equipment company Adidas, which he owned.

Residual assets of Crédit Lyonnais were held by the state following the bank’s collapse. Jean-Marc Ayrault, then leader of the Socialist opposition in parliament, and later prime minister under President François Hollande, was among those who instigated the court action, alleging that the arbitration had been rigged as a pay-off to Mr Tapie.'

By Adam Thomson and Hugh Carnegy in Paris
Source: ft.com