French finance minister Christine Lagarde is hotly tipped to replace Dominique Strauss-Kahn, arrested in New York last weekend on sex assault charges, as Managing Director of the InternationalMonetary Fund (IMF). Mediapart has exclusively obtained a copy of a confidential report by the French national audit office, the Court of Accounts, which we publish here and which contains details that could potentially scupper her candidacy to become IMF chief. It throws deep suspicion on Lagarde's role, already the object of legal moves for suspected "abuse of authority", in a massive out-of-court settlement of 403 million euros of public funds awarded to controversial French tycoon Bernard Tapie in 2008. Laurent Mauduit reports.
The report by the French national audit office investigates the background of an extraordinary government decision to enter into private arbitration in an until then long-standing court dispute that opposed the French state and flamboyant French tycoon Bernard Tapie. It also looks at the highly surprising decision not to appeal the judgment that awarded Tapie, on July 7th 2008, with 403 million euros to be paid from the public purse.
The dispute centred on Tapie's alleged spoliation by the former state-owned bank Crédit Lyonnais during its mandated sell-off of Tapie's business interests, notably his controlling share of the Adidas sportswear and accessory company, in the early 1990s. Tapie became involved in a lengthy legal fight for damages which he brought against the French government agency responsible for the liabilities of the defunct bank,which collapsed following a high-risk lending scandal in1993. For more on the background of the dispute, and the chequered, twice-fold rags-to-riches life of Bernard Tapie, click here.
In October 2007, five months after Nicolas Sarkozy's election as French president,for which Tapie was notably a campaigner, the state agency responsible formanaging the liabilities of the bank, the Consortium de Réalisation (CDR),agreed with Tapie's representatives to settle the dispute through out-of-courtarbitration. The move, sanctioned by finance minister Christine Lagarde and first set in train by her predecessor and longstanding friend of Tapie, Jean-Louis Borloo, proved highly favourable for Tapie's claim. The national audit office report, as Mediaparat can reveal here, provides evidence of how Tapie benefitted from serious violations of the laws of state, pointing suspicion at Lagarde and the senior civil servant in charge of the CDR over their management of the arbitration procedure.
The revelations in the report could not have come at a worse time for Christine Lagarde. Hitherto touted as one of the European frontrunners to succeed Dominique Strauss-Kahn as Managing Director of the International Monetary Fund (IMF), Lagarde is strongly implicated by the national audit office, better-known as the Court of Accounts (after its French title, la Cour des Comptes). And the accusations made by the state auditors could bear heavily on the proceedings now targeting the finance minister herself.
On May 10th, Jean-Louis Nadal, public prosecutor with France's highest court of appeal (Cour de Cassation), acting on a petition from Socialist Party Members of Parliament, requested the Court of Justice of the French Republic (the CJR, which adjudicates suspected ministerial misdeeds) to investigate Lagarde for "abuse of authority" in the out-of-court settlement that awarded Tapie a fortune in taxpayers' money. The CJR's commission des requêtes, a panel of magistrates handling letters rogatory, is expected to reach a decision soon.
The Court of Accounts is competent for financial matters: it does not have the power to say whether any criminal offences were committed in this case. But it does have the power to point to financial irregularities. And a glance at the report suffices to show that the irregularities were legion, and attributable to the finance ministeror various other parties to the case. The following are the salient facts brought to light by the state auditors, and which are presented in further detail over the following pages of this article:
- Bruno Bezard, managing director of the French Agencyfor State Shareholdings (Agence des Participationsde l'Etat, APE), wrote a whole slew of memos to successive financeministers warning them against going to arbitration in the Tapie case. "I formally advised the previous minister's predecessor against [...] authorizing the CDR, if it were to refer this proposal to the EPFR [the Public Establishment for Financing andRestructuring, set up to supervise the CDR], totake this route, which would run counter to the interests of the CDR and the State,"he told Christine Lagarde. "The APE hasinformed the minister and her predecessors [...] of the substantial risks of sucha procedure for the CDR, and through it for public finances, in particular inthe context of the favourable ruling by the Courde cassation," he insists on September 17th of that year. However, the finance minister paid no heed to these warnings.
- The Court of Accounts judges itwould be beyond its remit to say whether going to arbitration was legal, but itdoes believe there was wrongdoing: "Given these uncertainties, it was necessaryto make sure by every appropriate means, including consultation with the Council of State (Conseil d'Etat [legal advisor to the executive branch andadministrative court of last resort]), whether the CDR was empowered to resort to arbitration on behalf of a public establishment.
- Despite the uproar in Franceover the damages awarded to Bernard Tapie, Christine Lagarde announced on July 28th2008 that she had given the CDR written instructions not to seek anout-of-court settlement. To justify her decision, she said she had "taken noteof the analyses produced by the CDR's advisors" and which "estimated that the chances of an appeal were weak."The Court of Accounts states that this was an untruth. As Mediapart has previously revealed, two of the four legal advisors in question had advised the state to go to arbitration.
- The Court of Accounts has ascertained that "possible grounds for recusal" of one of the three arbitrators were discovered in the autumn of 2008, but that fact was never publicly disclosed.The state auditors came across a "statement of fees" suggesting that one of thethree arbitrators, Pierre Estoup, might have received a payment in 1999 after ameeting with Maurice Lantourne, Bernard Tapie's lawyer. The arbitrator in question did not disclose that at the outset of the arbitration, even though hesigned an undertaking to declare potential conflicts of interest in the case.
- The Court of Accounts points out that the version of the settlement signed on November 16th 2007 "differs from the wording and modifications that were approved by the CDR's board on October 2nd 2007 on an important point concerning the qualification of moral prejudice for the entire claim for compensation of 50 million euros in the name of Mr. and Mrs. Tapie."
- The report by the Court of Accounts magistrates reveals thatJean-Louis Borloo, former lawyer for Bernard Tapie, and who was briefly financeminister between May and June 2007, instructed his principal private secretary,immediately after taking up his ministerial post, to begin the arbitrationprocedure sought by Tapie, who is a longstanding friend of Borloo.
See the report, available in French only, below (please note clarifications in the 'Boîte Noir' box bottom of page), or click here to download.
The Court of Accounts report, addressed to the two presidents of the Finance Commissions in both houses of French parliament (the National Assembly and the Senate), has been privately passed around in parliament, in the finance ministry and the offices of the president and prime minister.
Thus far, only a few reactions have leaked out to this incendiary report, dated October 27th 2010, which is 105 pages long including annexes, marked "confidential" on every page and hand-signed by Christian Babusiaux, president of the first chamber of the Court of Accounts. In a recent report, Jérôme Cahuzac, (Socialist Party) president of parliament's Finance Commission, quoted selected passages from the auditors' findings to draw attention to several serious anomalies.
But the complete report, containing all the facts it brings to light, had not yet been disclosed - for a quite scandalous reason, mentioned in the report: the arbitration settlement that awarded a fortune in taxpayers' money to Bernard Tapie was sealed by a confidentiality clause.
This is also the reason why it is most probably illegal for a state-owned establishment to go into out-of-court arbitration, which frequently entails a confidentiality clause, although the French Declaration of the Rights of Man lays down an absolute principle of transparency in Article 14: "All citizens have the right, either in person or through their representatives, to ascertain the need for the public contributions, to freely authorize these contributions, to monitor their use, and to determine the amount, basis, collection and duration of contributions."
The magistrate who signed the report makes clear that by extension, the report itself contains other information also covered by this confidentiality clause, saying that "it is up to the recipients to ensure that whatever information contained in this document that could still be considered as being of this nature remains confidential."
The report from the Court of Accounts goes on to detail how the government decided to halt the normal legal procedure, even though this was working to its advantage, and give a tribunal of private individuals the task of arbitrating on the dispute between the state agency responsible for managing the liabilities of the Crédit Lyonnais, the Consortium de Réalisation (CDR), and Bernard Tapie over the sale of his controlling stake in sportswear and accessories company Adidas.
The report examines accounting controls and management at the CDR in 2007 and 2000, and examines the CDR's relations with the government body that supervises and finances it, the Public Establishment for Financing and Restructuring (l'Etablissement Public de Financement et de Restructuration), the EPFR. It also looks at the CDR's relations with the finance ministry, the private office of finance minister Christine Lagarde, and with the main departments at the ministry, including the French Agency for State Shareholdings (l'Agence des Participations de l'Etat), the APE.
Reading the report, it becomes clear early on that things were not carried out in accordance with the law. The financial magistrates who wrote it suggest that practically nothing was done in line with legal rules and good practice, and that everything was done to the detriment of the public interest and public funds, and to the benefit of Bernard Tapie.
The main issuesraised by the report of the Court of Accounts are as follows:
* The state had nothing to benefit from arbitration
Firstly, the Court of Accounts gives a final evaluation of the amount awarded in favour of Tapie in the private arbitrators' judgment. The arbitration process ended up costing CDR "a total of nearly 403 million euros in 2008, much more than the sentence pronounced by the Paris Appeals Court on September 30th 2005" which was set at 135 million euros.
So why did the government choose arbitration? At the height of the controversy over the Tapie affair, finance minister Lagarde often noted that the legal procedure was dragging on, exposing the government to a major financial risk. However, the report from the Court of Accounts says the exact opposite.
"The eventuality that a final decision from a higher court could be more costly than the amount in the Paris Appeals Court's judgment on September 30th 2005 (135 million euros) appeared unlikely," the report said, stating the CDR's position at the beginning of 2007, before it went to arbitration.
This clearly means that if the government wanted to minimise the strain on public funds, clearly it only needed to continue with the legal strategy of letting the French justice system take its course and obtain a final ruling from the Cour de Cassation, France's highest court of appeal, which would have been more favourable for the CDR.
* Lagarde ignored warnings
However, the government took a different route. The Court of Accounts' version of this is surprising. It suggests that Christine Lagarde turned a deaf ear to the numerous warnings, particularly from the French Government Shareholding Agency, the APE, and imposed an arbitration procedure against its own interests.
In early 2007, a few months before the presidential elections won in June by Nicolas Sarkozy, Tapie and his lawyers were doing all they could to try and convince the CDR and the finance ministry to take the arbitration route. But the idea was making no headway.
Bruno Bezard, APE managing director at the time and responsible for supervising public assets for the finance ministry, "issued an unfavourable opinion of the arbitration option" according to the Court of Accounts' report. The idea was then buried in the following months.
With hindsight, the APE's staunch opposition - of which Lagarde was naturally informed when she took office as finance minister in June 2007 - takes on greater significance. In a memo to the then finance minister dated February 23rd 2007, the APE's managing director "formally" advised against pursuing the offer of arbitration, the report says.
"It seems to be against the interest of both the CDR and the government to accept the proposal from the liquidators of the Tapie group to settle all the outstanding disputes within the framework of an arbitration procedure, in view of the obvious risks that such a procedure would represent for the CDR," the memo said.
In his memo, Bezard, one of the most influential senior civil servants at the finance ministry, persisted, drawing the minister's attention to the fact that the principle governing arbitration is one of equity rather than of law.
"The warning was extremely clear," the Court of Accounts' report says, adding: "In this case, it is very likely that, regardless of the terms in which the basis of the arbitration procedure was phrased, a ruling to bring the ongoing lawsuits to an end would have been heavily influenced by considerations based on equity or custom and practice, and this would clearly have weakened the CDR's position, which was solid in legal terms."
Lagarde must have been aware of this warning since Bezard, a highly respected civil servant close to Sarkozy's inner circles, also wrote her a memo, dated August 1st 2007, in which he informed her of the memos he had written to her predecessors.
"I formally advised the previous minister's predecessor [Editor's note: Thierry Breton] against [...] authorising the CDR, if it were to refer this proposal to the EPFR, to take this route, which would run counter to the interests of the CDR and the State," the memo read.
Despite his conformist leanings and the fact that Lagarde had already rubber-stamped the arbitration option, Bezard wrote again to the minister on September 17th 2007, this time with an unmistakable warning.
"The APE has informed the minister and her predecessors [...] of the substantial risks of such a procedure for the CDR, and through it for public finances, in particular in the context of the favourable ruling by the Cour de cassation."
So at the very least, Lagarde was amply warned of the risks she was taking. In short, it would appear that she took the decision to go to arbitration under orders from the presidency and against the advice of her own ministry, which was fully aware of the risks.
Why then has she never mentioned the APE's emphatic opposition since then, although its views are normally unfailingly taken into account? The Court of Accounts' report does not dwell on this, yet it is clearly worthy of attention. It appears that events unfolded as if decisions were coming from on high, breaking with the procedures the government would usually have followed in such circumstances.
Although the Court of Accounts never actually mentions the role of the president's office and any possible directives Sarkozy might have given his finance minister, it confirms the impression that everything had been organised a long time before.
* Jean-Louis Borloo also in question
This impression that everything was decided, not after a legitimate inter-ministerial debate and after consulting with the relevant bodies, but in back-room deals between Bernard Tapie and his friends in high places, is backed up by another, valuable indication in the Court of Accounts' report.
"The former principle private secretary to the minister of the economy indicated to the Court during his testimony on July 20th 2010 that he had been told by the minister as soon as he took up his post on May 22nd 2007, that the choice had been taken to go to arbitration."
The report says that "no written record of this choice was brought before the Court". But this testimony, never made public until now, is undoubtedly highly significant.
Firstly, the testimony is all the more reliable since the former principle private secretary in question is Stéphane Richard, now head of France Telecom, who is also a close friend of Sarkozy's, himself a longstanding friend of Tapie.
Furthermore, there seems to be a suggestion that the arbitration procedure was set in motion within the government by a close friend of Tapie's.
The finance minister at the time was in fact Jean-Louis Borloo. He had been appointed on May 18th 2007, just after Sarkozy's election as president, and was abruptly dropped by the president just before the second round of voting in parliamentary elections in June. This followed a controversy resulting from an off-the-cuff remark Borloo made about the possibility of bringing in a "social" value added tax. Sarkozy demoted him to Minister for Ecology.
Borloo was Bernard Tapie's lawyer for many years. He advised Tapie in his many ventures in the 1980s and early 1990s. So the Court of Accounts, without treating the matter in detail, suggests almost as an aside that as soon as Borloo became finance minister, he had nothing better to do than the take a decision that risked costing the state dearly and which benefitted his former client and close friend, Bernard Tapie.
Christine Lagarde inherited the case in mid-June 2007. By all accounts she was aware of the secrets since she kept Stéphane Richard as principle private secretary.
Reading the report, it appears that the move for arbitration was one of the first issues on the government's agenda after taking office. "According to a memo from the managing director of the APE to the minister dated September 17th 2007, the principle of going to arbitration was ratified by the government at an unspecified date prior to September 11th 2007," the report says.
This would appear to suggest that a decision had been taken on high to favour Tapie, and that as soon as the new government, headed by Prime Minister François Fillon, had taken office, the two successive finance ministers had no option but to put this "choice" into practice despite the objections of their ministry officials.
* Arbitration ruling improperly ratified
The report also points to the agreement put forward by the arbitration panel being improperly ratified by CDR's management committees. This irregularity was revealed in a report from the Socialist chairman of the French parliament's Finance Commission.
The Court of Accounts' report says that the version of the agreement signed on November 16th 2007, "differs from the wording and modifications that were approved by the CDR's board on October 2nd 2007 on an important point concerning the qualification of moral prejudice for the entire claim for compensation of 50 million euros in the name of Mr. and Mrs. Tapie."
"The sentence 'In their capacity as Mr. and Mrs. Tapie's liquidators, the B parties limit the amount of the totality of their requests for compensation to 50 million euros' was replaced by the following sentence: ''In their capacity as Mr. and Mrs. Tapie's liquidators, the B parties limit the amount of the totality of their requests for compensation for a moral prejudice to 50 million euros'."
So it is that we learn that this ceiling of 50 million euros - which ultimately resulted in payment of 45 million euros in compensation, an exceptional sum that sparked a wave of indignation in French public opinion - was finalised in an improper manner.
The Court of Accounts commented: "This point was nevertheless of capital importance for public finances, given that compensation for a moral prejudice had been left to the judge to decide freely, that the arbitration procedure is confidential and is thus exempt from comparison and that the amounts in question were not liable for tax."
"[...] Regarding the moral prejudice, the wording the chairman of the CDR finally accepted, without approval from his board or from the EPFR, amounted to accepting the possibility of a judgment against it of some 50 million euros, even though similar judgments in ordinary judicial courts are much lower (under a million euros), and a moral prejudice of one euro has been decided in the Appeals Court."
* Serious suspicions surround one of the arbitrators
During Mediapart's investigations into the Tapie affair, we have on several occasions focused on potential conflict of interests among the three arbitrators who issued the favourable ruling for Tapie.
In the course of these enquires, we noted that one of them, Pierre Mazeaud, had agreed to become an arbitrator despite knowing that the choice of going to arbitration could be contested in this case, and might even be illegal. While he was still chairman of the Constitutional Court (Conseil Constitutionnel), he had a short while earlier censured a law with the explicit aim of allowing public establishments to seek arbitration.
A second arbitrator, Jean-Denis Bredin, was, between 1976 and 1980, vice-president of the political party, le Mouvement des radicaux de gauche (the Movement of Left Radicals), for which Bernard Tapie later became standard bearer.
The third arbitrator, Pierre Estoup, former president of the Versailles appeal court, was involved in a controversial arbitration between the late Gabonese president Omar Bongo and André Tarallo , in charge of African operations for the oil company Elf. During the 2002 corruption trial that followed the exposure of the so-called Elf Affair, one of France's largest-ever sleaze cases, Estoup came in for particular criticism in the Paris court. In its judgment, it found his arbitration had been performed in "strange conditions" and that it was in fact designed to serve as an alibi for Tarallo in a significant case of fraud, and for which Tarallo was finally found guilty and sentenced.
Estoup came in for lengthy attention in the Court of Accounts report. After having noted the fact that the arbitrators were not chosen according to the usual conditions for this type of procedure, it added: "It was only afterwards, following the announcement of the July 7th 2008 [arbitration] judgment, but before the complimentary judgments of November 27th 2007, that possible grounds for recusal [towards an arbitrator] would be discovered."
The report did not say who found a reason for recusal. It would be reasonable to assume that the finance minister was made aware of it. Just why the minister did not cancel the arbitration because of this is not mentioned either.
The report makes clear that the three arbitrators were made, before they began their work, to sign "declarations of independence, which included the requirement to provide a detailed account" concerning potential conflicts of interest. However, the report details how, on October 2nd 2008, it was discovered that arbitrator Pierre Estoup had previously been involved in professional activity with Bernard Tapie's lawyer Maurice Lantourne.
The report mentions that two academic experts studied the matter and concluded that there had been a "non-respect" of the requirement to reveal potential conflicts of interest, although they argued that the details of the case did not warrant a formal recusal procedure against Estoup. Thus it was that this significant conflict of interest was never made public, remaining a closed secret between the arbitration tribunal, the DCR council and various ministerial offices.
* A potentially illegal choice
The report suggested that the choice made to opt for arbitration was illegal. "Questions can be raised concerning the juridical value of resorting to arbitration with regard to the text of article 2060 of the civil code", which states that the interests of "local authorities and public establishments" cannot be compromised in the management of significant disputes.
But it also concludes that it is not the role of the Court of Accounts to debate the issue any further. But it notes that neither the CDR, the EPFR nor the finance ministry had made sure of the issue of legality. "The question of the legality of the resorting to arbitration was never discussed in any of the meetings of the boards of the CDR or the EPFR, nor in any of the notes of the APE," it found.
"The president of the CDR declared that he had never asked for, nor received, a single note from his legal services on the question of the legality for the CDR of resorting to arbitration in the Addidas/Tapie case," continues the report, which also suggests that serious errors had been made: "Given these uncertainties, it was necessary to verify by every appropriate means, including consultation with the Council of State, whether the CDR was empowered to resort to arbitration on behalf of a public establishment."
* When Christine Lagarde was economical with the truth
At the end of July 2008, finance minister Christine Lagarde ordered the senior civil servants who represented the State on the EPFR board to vote against any introduction of an appeal against the then-recent judgment in Bernard Tapie's favour. She issued a communiqué on July 28th justifying the move which underlined that she had "taken note of the analyses produced by the CDR's advisors" and which "estimated that the chances of an appeal were weak." In an article published on its French pages on September 2st 2008, Mediapart revealed then that this was in fact untrue, and that two of the four advisors consulted by the CDR had recommended an appeal against the judgement.
The report by the Court of Accounts confirms our revelations, and includes long extracts from the advisors' written conclusions and recommendations. It adds that Lagarde received a flurry of notes on the subject from the APE director-general, notably on July 22nd, 23rd and 25th 2008, which argued for an appeal against the arbitrators' decision. That of July 22nd warned: "It is all the same possible to consider that the exceptional extent [of the amount awarded by] the judgment, close to the maximum amounts demanded by the parties opposed to the CDR in the arbitration procedure, justify the formulation of an appeal for its annulment, even if this has only slim chances of succeeding."
However, Christine Lagarde, against the advice of her own administration, took no heed of this.
* The exorbitant cost for the public purse
Parliamentary sources have revealed that Bernard Tapie received a net sum of 230 million euros, although Lagarde had evaluated the sum in July 2008 at 30 million euros. The Court of Accounts provides no information on the subject although it did dress an account of the cost to public finances.
It noted that the total cost of the judgment was 403 million euros. This was broken down as; 240 million euros paid out for material damages; 45 million euros in moral damages; 105 million euros in interest back payments for the material damages and 13 million euros for company liquidation costs (the Bernard Tapie Group was pronounced bankrupt in 1994). To reach the net cost for public finances, several factors, including Tapie's tax debts, needed to be taken into account. The cost for the CDR, notes the report, amounted to 308.4 million euros. The cost for the public purse was less, it notes, because of tax debts recovered and the tax payments due on the sums awarded for material damages.
* A catalogue of faults
In a chapter entitled ‘Opinion concerning the management', the report lists the many faults committed in the handling of the case. Under the heading ‘The intended procedures were not followed', it notes that the head of the CDR, Jean-François Rocchi, "personally" managed the case without calling on the necessary advisors; that he signed an agreement for arbitration that was different to that voted for by his board; that he "did not inform his board of what was at stake with the absence of the Crédit Lyonnais as a party to the arbitration and that he had misinformed the EPFR representative.
The report also concludes that "the terms of the arbitration contributed to a reinforcement of the risks" involved. It points out that "the parties voluntarily relinquished the possibility of lodging an appeal against the arbitrators' judgment." It also says that "nothing forced the CDR" to accept the conditions set out in the arbitration compromise agreement.
* The likely consequences of the report
This highly critical report by the Court of Accounts will now likely serve in three separate procedures concerning the arbitration award to Tapie.
Firstly, there is the investigation that the public prosecutor with the Court of Appeal has asked the French Court of Justice (Cour de justice de la République) to open regarding the behavior of finance minister Christine Lagarde. The Court of Justice, a constitutional body composed of Members of Parliament and magistrates, is empowered to make judgments on ministerial actions.
Lagarde is also the object of a suit for alleged ‘abuse of position' filed by a Member of Parliament for the centre-right Nouveau Centre party, Charles de Courson, along with two lawyers, Geneviève Sroussi and Philippe Lhomme , who are represent taxpayers. Their move was initially thrown out, including upon appeal, but was recently finally judged to be legally valid by the Council of State (Conseil d'Etat).
Thirdly, the Court of Budgetary Discipline (la Cour de discipline budgétaire) is soon likely to be involved in the affair. CDR chief Jean-François Rocchi is widely expected to be called to account by the court which, if it finds evidence of misdeeds that are covered by criminal law, is required to transfer its findings to the public prosecutor's office.
Report by Laurent Mauduit
English version: Sue Landau, Eric Rosencrantz and Graham Tearse
(Editing by Graham Tearse)