UPDATE 2-France Telecom's CEO under investigation in Tapie probe

Wed Jun 12, 2013 3:18pm EDT

* Board to meet soon to discuss Richard's position

* Government says will assert its position as shareholder

* Unions divided on whether CEO should stay (Adds lawyer on plans to appeal)

By Leila Abboud

PARIS, June 12 (Reuters) - France Telecom's chief executive, Stephane Richard, was placed under formal investigation for fraud on Wednesday over his role as a government aide in a 2008 arbitration case that resulted in a large pay-out to businessman Bernard Tapie.

The decision cast doubt on Richard's ability to continue as the head of Europe's fourth-biggest telecom group by sales.

The government, which owns 27 percent of the company and nominates three of its 15 directors, said the board of France Telecom would meet in the coming days to discuss Richard's position.

"Through its board members the state will assert its position as a shareholder," a spokesman for the prime minister said.

Richard was a top aide to former Finance Minister Christine Lagarde in 2008 when the government of the day awarded Tapie 285 million euros ($373 million) in damages in a long battle with the now-defunct bank Credit Lyonnais.

Tapie, a supporter of former President Nicolas Sarkozy, contested the bank's role in the sale of his stake in sports clothing firm Adidas in 1993.

Richard has denied any wrongdoing in the case.

His lawyer, Jean-Etienne Giamarchi, said that Richard planned to appeal the decision to put him under investigation and has several weeks to file the motion.

Under French law, when a person is put under investigation proceedings are a step closer to trial, but such inquiries can also be dropped without a trial.

A spokesman for France Telecom, which will change its corporate name to Orange on July 1, said the decision would have no immediate impact on Richard's responsibilities.

"He will be at his desk tomorrow morning," said the spokesman.

Bruno le Roux, the leader of the Socialists in the National Assembly, said in a television interview that the board would have to decide if the investigation would affect the group's governance.

"I think it would be difficult and Richard may need to at least retreat a bit from his functions," le Roux said.

France Telecom's labour unions, which have credited Richard with repairing the damage from a spate of suicides in 2009, are divided over whether he should continue. The SUD union said such an investigation was "incompatible" with running a state-backed company, but another union backed Richard for his "strong track record" running the company.

Any successor to Richard would face a tough task managing the group, which operates in Britain, Spain, Poland and a dozen Middle East and African markets and employs some 170,000 workers. At home France Telecom has been fighting a price war touched off by the arrival of the new low-cost mobile competitor Free Mobile 18 months ago.

France Telecom shares closed down 0.1 percent to 7.47 euros, slightly underperfoming the French blue-chip index. (Additional reporting by China Labbe; Writing by Geert de Clercq; Editing by Greg Mahlich and Leslie Adler)