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Christine Lagarde. Credit: IMF Staff Photo/Stephen Jaffe

The chief of the world’s foremost financial institution is accused of negligence leading to misuse of public funds for approving a €400m ($428m) out-of-court settlement from the French state to businessman Bernard Tapie in 2008.

If convicted, she could face a prison sentence of up to one year and a fine of €15,000 ($15,917). The trial casts a cloud of uncertainty over her second term as leader of the IMF.

Speaking on French TV yesterday, Lagarde said she felt confident and denied any wrongdoing. She explained that she believes everyone is negligent at times and that she did her job to the best of her ability.

The trial is just the fifth to take place at a special French court that tries ministers accused of crimes related to their positions.

The case centres on whether Tapie was offered a deal in return for his support for former French president Nicolas Sarkozy, whom Lagarde served under as finance minister from 2007-2011.

Tapie, a business tycoon, sued the French state for compensation after selling his stake in sports company Adidas to then state-owned bank Credit Lyonnais in 1993. His claim argued the bank later resold his stake for a much higher sum.

The case landed on Lagarde’s desk two decades later, in 2008. In an unusual move, she referred it to private arbitration rather than the normal courts – in her upcoming trial, the court will seek to establish whether this was part of an agreement between Tapie and Sarkozy.

The private arbitration panel awarded Tapie €403m in damages and interest. By this time, Credit Lyonnais had collapsed and the funds came from the public purse, signed off by Lagarde.

This decision was later overruled in court, which judged that Tapie should repay the sum with interest – a decision Tapie is currently in the process of appealing. The court also said Lagarde had chosen to ignore advice by approving the payment and should stand trial for negligence. She also appealed, but this was thrown out.

She denies negligence and that she gave Tapie any special treatment or acted on Sarkozy’s orders.

Last week, IMF spokesman Gerry Rice declined to comment on the case because it is currently before the French judiciary.

He reiterated, however, that the fund’s executive board continues to be briefed on developments and to have confidence in Lagarde to “effectively carry out her duties”.

“As I’ve said before, the board has been kept fully up to date on this process, and throughout this process, the board has expressed its confidence in Madam Lagarde and that remains the case to date,” he stated.

The IMF executive board approved Lagarde for a second five-year term at the helm of the fund in February of this year, while she was in the process of appealing the decision that she must stand trial