By WILLIAM HOROBIN, NOEMIE BISSERBE and DAVID GAUTHIER-VILLARS
PARIS—A French criminal court Thursday ordered a probe into whether International Monetary Fund chief Christine Lagarde was complicit in any misuse of public funds in 2008, when she was France's finance minister.
The Cour de Justice de la République, a special court handling allegations criminal matters involving ministers, was responding to a claim by Socialist Party lawmakers that a €420 million ($602 million) award to tycoon Bernard Tapie that was done under her watch was unjustified. The award followed a complex case in which Mr. Tapie complained that a bank had defrauded him.
After parts of the bank were nationalized, Mr. Tapie was pitted against the French state. The change meant that the case was the finance minister's responsibility and that Mr. Tapie was compensated using public funds. Ms. Lagarde referred the case to an arbitration panel, which then made a binding decision.
Ms. Lagarde has repeatedly said her intervention in the matter was fully lawful, and she denies any wrongdoing.
The investigation would look into whether Ms. Lagarde had been "complicit in the misuse of public funds" in the case, according to a statement by the court. The laws under which the court says Ms. Lagarde could eventually be charged, carry a fine of up to €150,000 and a 10-year prison sentence, according to France's penal code.
The latest problem involving IMF leadership comes amid growing problems in the world economy: Economists fear the U.S. is entering recession; the sovereign-debt crisis is threatening to engulf two of Europe's largest economies; and some emerging markets are near overheating.
The IMF's executive board said Thursday that it wouldn't comment on the case, but that it was "confident that [Ms. Lagarde] will be able to effectively carry out her duties as managing director."
Ms. Lagarde has said she wouldn't resign as IMF managing director despite any investigation.
Her lawyer, Yves Repiquet, issued a statement indicating he expected the investigation wouldn't lead to charges. "This will be neither the first nor the last investigation to end without the filing of charges," he said. He said Thursday's decision to launch a probe "didn't signify that there was some basis for bringing criminal charges against Ms. Christine Lagarde."
He called the allegations "unfounded" and told The Wall Street Journal that the "procedures have been used for exclusively political ends."
Local media reported that in the 18-year history of the Cour de Justice de la République, it has fully investigated 37 officials and convicted just three ex-ministers. Of those, two were punished—then given suspended sentences.
Before the IMF board selected Ms. Lagarde, the IMF's chief counsel discussed with French President Nicolas Sarkozy's office the potential risks posed by the case involving Mr. Tapie, according to a person close to the matter. The board was ultimately satisfied by the facts, this person said.
Ms. Lagarde told the board she would waive the diplomatic immunity the managing director's position gives the holder, he said.
Ms. Lagarde succeeded Dominique Strauss-Kahn as IMF managing director last month, after Mr. Strauss-Khan resigned in May following his arrest in New York on charges of attempted rape. He has pleaded not guilty to the charges.
The Socialist lawmakers who brought the claim to the attention of magistrates earlier this year question whether the state-controlled entity that was at loggerheads with Mr. Tapie had the right to settle with him through arbitration.
The lawmakers point to a law forbidding state agencies to go to arbitration. Legal advisers to Ms. Lagarde have said the state-controlled body was registered as a commercial entity and was entitled to settle the Tapie matter through arbitration.
On Thursday, the head of the French Socialist Party group at the National Assembly said the court's decision to open an inquiry showed there had been anomalies in judicial procedure in the case.
"All that illustrates the confusion of political, economic and financial interest that reigns at the summit of the state since the election of Nicolas Sarkozy" as president of France, said Jean-Marc Ayrault. "This incrimination will obviously be a significant inconvenience [for Ms. Lagarde] in her new functions at the IMF. But that cannot be used to forget the mistakes committed in this affair."
—Ian Talley
contributed to this article.
Write to Will Horobin at william.horobin@dowjones.com and David Gauthier-Villars atDavid.Gauthier-Villars@wsj.com
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