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France Tel CEO's future in question after fraud inquiry

By Leila Abboud and Alexandre Boksenbaum-Granier

PARIS (Reuters) - The future of France Telecom Chief Executive Stephane Richard remained in question on Thursday, after he was put under investigation for conspiracy to commit fraud during his time as a top government aide.

The board of Europe's fourth-largest telecom group, which is 27 percent owned by the state, is set to meet in coming days to discuss Richard's fate.

The views of the Socialist government led by President Francois Hollande will likely determine the outcome, even though the state only holds three of 15 board seats, according to three sources familiar with the company's governance.

With the core of its 170,000 employees being former civil servants, France Telecom remains strongly influenced by the state. The group is expected to make network investments in the country's interests, lay-offs are taboo because of strong unions, and investors have long known that shareholders' interests are not always the priority.

Digital Economy Minister Fleur Pellerin said the government must decide "whether the judge's decision (to put him under investigation) poses a problem for Stephane Richard to stay on", adding that talks with its three board members were ongoing.

"The issue is not his performance at the company to date," said Pellerin in a radio interview. "It is whether the decision has weakened him."

Richard worked for former finance minister Christine Lagarde in 2008 when the government awarded tycoon Bernard Tapie 285 million euros ($373 million) in damages in his long battle with defunct bank Credit Lyonnais.

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

Investigating judges are examining allegations that Tapie got favorable treatment in the arbitration because of his political ties.

Richard has denied any wrongdoing. France Telecom declined comment.

The government announced on Thursday it would call for a review of the arbitration ruling itself - a move that could result in it eventually recovering some of the pay-out to Tapie.

MAIN ISSUE

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

Investors have so far taken Richard's travails in their stride, because they don't think the main issue affecting performance - namely a grueling price war in the group's key domestic market - will be much affected by a change in leadership.

Shares in France Telecom were down 0.5 percent at 7.43 euros by 9.49 a.m. ET, largely in line with the broader market.

The group, which also operates under the Orange brand, has seen its shares slump 24 percent in the past year, the third-worst performing telecom stock in Europe, because of tough competition sparked by low-cost mobile rival Iliad.

"I'm worried about the future of Orange, but not because the CEO is under investigation," said Christian Jimenez, who runs Diamant Bleu Gestion, whose funds hold France Telecom shares.

"It's getting harder and harder for Orange to profit from the major investments it makes in its networks."

Analysts are forecasting a roughly 15 percent drop in operating profit this year, largely because of competition in France.

Renaud Murail, a fund manager at Barclays Bourse, said Chief Financial Officer Gervais Pellissier could serve as a temporary boss if Richard is forced to leave.

"Richard is surrounded by a team at Orange, so not everything depends on him, which is why the share reaction has been minimal," said Murail.

"The real issue facing the company today is improving margins in the move to superfast 4G mobile services and not so much a change in top management."

France Telecom, along with rivals Vivendi's SFR and Bouygues Telecom, is rushing to build 4G networks in France and has already launched such services in Britain.

(Additional reporting by Nicholas Vinocur; Editing by Mark John and David Holmes)

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