Paulson & Co, the hedge fund linked to civil fraud charges against Goldman Sachs Group Inc, moved to head off investor concerns about its role in a deal that has scarred the reputation of the Wall Street bank and overshadowed blow-out quarterly earnings.

Goldman is accused of defrauding investors by failing to say that prominent hedge fund manager John Paulson bet against a Goldman subprime debt product that he helped design.

Goldman is being investigated by the Securities and Exchange Commission (SEC) and Britain's market watchdog, which launched its own probe on Tuesday. Its shares are down 13 percent since the SEC laid its charges, and closed 2 percent lower on Tuesday despite thumping quarterly earnings expectations.

Goldman's troubles also caused political reverberations.

A top Republican congressman questioned whether politics affected the timing of the government's case, while in Britain, the Liberal Democrat party's leader said Goldman should be banned from UK government contracts until the case is settled.

Paulson, in a conference call on Monday and followed up with a letter to investors late on Tuesday, says neither he nor anyone else at the firm had received a so-called Wells notice indicating that charges might be filed against the fund, several investors who listened to the call said.

No one had yet notified the $32 billion fund of their intentions to pull money out, they said.

We are interested in buying out people who want to get out of Paulson, but so far no one has stepped forward, one of the investors, who asked not to be named because of the sensitivity of the matter, said late on Tuesday.

A spokesman at Paulson & Co, which earned $15 billion by correctly betting in 2007 that the U.S. housing market would collapse, declined to comment.

POLITICAL VILLAIN

Experts said the case and the response showed Goldman's traditional strategy of keeping media and critics at bay behind a wall of silence was no longer valid.

They can't play that game anymore, said Michael Robinson, a financial and crisis public relations consultant with Levick Strategic Communications. The world has changed too much.

Marc Faber, author of the Gloom, Boom and Doom report, described the lawsuit against Goldman Sachs as a hunt for scapegoats amid economic problems faced by the United States.

The target now is Goldman Sachs. You distract the masses with a villain, Faber said in Singapore.

Goldman's leading role on Wall Street, coupled with massive paychecks to staff and bumper profits, make it an obvious target.

Goldman said its first-quarter net income nearly doubled to $3.29 billion, bolstered by strength in fixed income trading and principal investments. The earnings of $5.59 a share easily topped analysts' forecasts, according to Thomson Reuters I/B/E/S.

The bank reported its lowest-ever first-quarter compensation ratio, but still set aside $5.5 billion for compensation and benefits in the period.

The reduction in money set aside served to bolster earnings that could bring more public scrutiny to the 141-year old bank, last year described by Rolling Stone magazine as a giant vampire squid wrapped around the face of humanity.

The bank's co-general counsel, Greg Palm, rebutted the SEC charges during the bank's earnings conference call.

Palm said the firm was very disappointed that the SEC brought charges and said Goldman would never mislead anyone.

To lead their defense against the charges, Goldman has brought in Richard Klapper, a lawyer with an impressive record of courtroom victories for some of the biggest financial firms and a reputation as a fearsome litigator.

'RECKLESSNESS AND GREED'

Goldman's forecast-beating earnings came as Britain's Financial Services Authority (FSA) said it started a formal investigation into Goldman Sachs International in relation to the SEC allegations. The FSA said it would work closely with its U.S. counterpart.

Nick Clegg, leader of the Liberal Democrats, the UK's third-largest party, said the allegations against Goldman are a reminder, if we needed one, of the recklessness and greed that disfigured the banking industry as a whole.

Rival institutions in Asia were seizing the chance to try and elbow in front of Goldman on major upcoming deals, sources familiar with the matter told Reuters.

Investment bankers have been lobbying executives at state-owned Agricultural Bank of China and pushing officials in Beijing to drop Goldman as an underwriter for the bank's more than $20 billion IPO.

Rivals are also asking officials at state-controlled Bank of Communications to ditch Goldman from its joint global coordinator role in the Chinese bank's $6.1 billion rights issue, the sources said, though there was no evidence either bank was considering pushing Goldman aside.

(Additional reporting by Steve Eder and Paritosh Bansal in NEW YORK, Dan Margolies in WASHINGTON; George Chen and Fiona Lau in HONG KONG and Steve Slater in LONDON; Writing by Christian Plumb and Lincoln Feast; Editing by Ian Geoghegan)

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