Goldman Sachs Group Inc said the bond trader at the center of a landmark civil fraud case against the firm is taking time off, and the regulatory fallout on Wall Street threatened to widen.

The U.S. Securities and Exchange Commission accused the biggest and most influential U.S. securities firm of hiding from investors the fact that a prominent hedge fund manager was betting against a subprime mortgage product that he helped create.

The fraud suit has cast a shadow over what is expected to be a blockbuster earnings report from Goldman on Tuesday. The 141-year-old bank said its co-general counsel, Greg Palm, would join its earnings call alongside Chief Financial Officer David Viniar.

U.S. President Barack Obama prepared to fly to New York later in the week to press what would be the biggest crackdown on the financial industry since the Great Depression, and European regulators said the Goldman case could bolster their efforts to regulate derivatives.

Fabrice Tourre, the French, self-described fabulous Fab who is the only Goldman staffer named in the U.S. Securities & Exchange Commission civil lawsuit, remains a Goldman employee, a spokeswoman for the bank said. The 31-year-old has made a personal decision to take a bit of time off, she said.

The SEC complaint, lodged on Friday, included e-mails in which Tourre, now based in London, appeared to exult in the products he was creating.

Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created..., he wrote in one.

Goldman shares were higher in afternoon trade on Monday after their biggest drop since the financial crisis on Friday, helped by a Bloomberg news report that the SEC's two Republican commissioners both voted against suing Goldman.

The fact that the vote was close has been the proximate cause for the stock's rally. This means it wasn't a clear-cut decision by the SEC, said Doug Kass, president of hedge fund Seabreeze Partners Management.

The bank may also face questions about its failure to disclose to investors when the SEC first notified it that it was facing liability in the case.

IKB CONSIDERING STEPS

The SEC has said investors were kept in the dark about Paulson shorting the synthetic collateralized debt obligation he helped Goldman assemble. One of those investors, German bank IKB, said it was reviewing its financial transactions in the run-up to the crisis. The bank said it might consider taking legal steps, but had no grounds for action so far.

The Dusseldorf-based bank nearly collapsed in 2007 and lost almost all of the $150 million it put into the Goldman CDO.

Deutsche Bank and UBS led a 2 percent slide by European bank shares on Monday as investors feared regulators would probe deeper into past deals throughout the industry.

Britain and Germany said they could also pursue Goldman. The UK financial regulator said it was looking at the circumstances of the SEC's charges, as was Germany's BaFin, which said it was considering possible damage claims.

All this suggests you should not buy into a sector where the regulators are about to move the goal posts, said Bruce Packard, an analyst at Seymour Pierce in London.

Even if they don't, the pitch surface is so uneven that if the goal posts aren't moved, unfortunately we might see a few more broken legs in future.

The prospect of a wider probe unsettled investors across the sector.

Citigroup Chief Financial Officer John Gerspach said during his bank's earnings call that the bank is being probed by the SEC as part of an industrywide investigation into subprime and other issues. He said the bank had no involvement with the Goldman case.

At the peak of the CDO market, Goldman underwrote more than $20 billion of the securities in 2006 and 2007 according to Thomson Reuters data.

REGULATION MOMENTUM

In the United States, Democrats tried to use the Goldman allegations to their advantage as they press for congressional approval of the most sweeping package of financial regulatory reforms since the Great Depression.

Senator Christopher Dodd said he was hopeful that agreement would be reached on a bill and claimed that his proposal would have stopped the type of activity alleged in the SEC's suit against Goldman.

EU market regulation chief Michel Barnier said that if Goldman was found to have committed fraud, it would reinforce the need for Europe to act to regulate derivatives.

Goldman shares closed up $2.62, or 1.63 percent, at $163.32 on the New York Stock Exchange.

The fact that the stock was down more than 12 percent on Friday seemed to be a very big move. Today people are stepping back and reevaluating that, said Giri Cherukuri, head trader at OakBrook Investments LLC, in Lisle, Illinois.

The U.S. stock market rose late in the trading day. Some investors said anxiety about the Goldman probe was continuing to take a toll.

Investors, ranging from banks to pension funds and local governments, lost billions of dollars on complex structured products like the one at the heart of the SEC case against Goldman, and many are considering legal action.

(Reporting by Karey Wutkowski, Kevin Drawbaugh, Christian Plumb, Dena Aubin, Steve Slater, Huw Jones, Jane Merriman and Clara Ferreira-Marques and Jonathan Gould and Edward Taylor in Frankfurt; Editing by Erica Billingham, John Wallace and Robert MacMillan)

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