A Primer on Paulson & Co.

NEW YORK (TheStreet) -- Famed hedge fund investor John Paulson was thrust into the limelight Friday because of a connection to the Goldman Sachs (GS) drama that is rocking the markets.

Goldman shares were plunging 11% in late trades after the Securities and Exchange Commission filed civil charges earlier in the day alleging the company committed fraud by deceiving investors on subprime mortgage-backed securities.

John Paulson, hedge fund manager

That's where Paulson comes in. The SEC is alleging that his firm Paulson & Co., one of the world's largest hedge funds, paid Goldman to structure a transaction in which the hedge fund could take short positions against residential mortgage-based securities chosen by none other than Paulson & Co., which presumably would pick RMBS that it thought would experience negative credit events.

In other words, after participating in the portfolio's selection, Paulson & Co. allegedly then shorted the same portfolio it helped create by entering into credit default swaps with Goldman Sachs. Goldman did not disclose Paulson & Co.'s short position or its role in the collateral selection process to investors, the SEC alleges.

The news has placed Paulson, who has been lauded because his hedge fund posted positive returns throughout the financial crisis, in a nefarious role -- one that contradicts the public praise he has received for being able to keep above water during the crisis when so many other hedge funds went belly up.

By betting against real estate when everyone else remained optimistic, Paulson was able to net $15 billion in returns. This equated to a personal profit of nearly $4 billion, according to RealMoney contributor Don Dion.

Last year, as the financial crisis began its retreat, Paulson once again showed his foresight by eagerly snapping up bank stocks including Citigroup (C), Bank of America (BAC) and SunTrust Banks (STI), among others.

As of Dec. 31, funds run by Paulson & Co. were valued at $19.5 billion, according to TheStreet'ssister site, Stockpickr. Two of Paulson's biggest positions at the end of the year were in the aforementioned Bank of America and Citigroup, which have both surged ahead of the first-quarter reporting season.