NEW YORK, April 1 (Reuters) - A private equity fund run by Goldman Sachs Group Inc, under fire over its business ethics, has agreed to sell back its stake in a media company that critics say facilitates sex trafficking.

GS Capital Partners III on Friday signed a deal to sell its 16 percent stake in Village Voice Media, which owns the website Backpage.com, back to management, a Goldman spokeswoman said Sunday.

The divestiture is the latest development in a growing controversy over online adult advertising that has pitted celebrities, law enforcement officials, members of Congress and a New York Times columnist against Village Voice Media, a private media company that has the largest share of revenue in the United States from online advertising of adult services.

The fund began negotiations with Village Voice Media in March, after deciding in 2010 that it had grown "uncomfortable with the direction of the company," and Goldman's inability to influence its operations, said Andrea Raphael, a Goldman Sachs spokeswoman.

Raphael said the fund invested $30 million in the Village Voice in 2000. The investment was converted into a 16 percent minority stake when the Village Voice merged with New Times Inc in 2006. She declined to disclose the sale price, but said the fund lost the "vast majority" of its investment.

Elizabeth McDougall, general counsel for Village Voice Media, said on Sunday that the media company has no plans to shut down its adult advertising section of Backpage.com.

Some critics claim that Backpage.com facilitates the trafficking of underage prostitutes and sex slaves, although others question that.

The media company has responded aggressively, challenging critics' data with editorial investigations and claiming that it goes to far greater lengths than competitors in cooperating with law enforcement and monitoring its ads for illegal activity.

In September, 2010, public pressure - including a letter from 17 of the nation's attorneys general, led the all-purpose online classifieds website Craigslist to shutter its lucrative adult section. Much of the advertising appears to have moved to Backpage.com.

Online prostitution advertising generated at least $3.1 million in revenue in February, on five U.S. websites, an increase of 9.8 percent from a year earlier, according to interactive media and classified advertising consultant AIM Group. Nearly 80 percent of the revenue was attributed to Backpage.com, AIM said in a report published March 22.

The Goldman Sachs sale was first reported in a New York Times column on Saturday by Nicholas Kristof, who told Reuters that when Goldman learned last week he was investigating the media company's interests, it "moved with record speed to unload their stakes" in Village Voice Media.

The Wall Street bank has attracted recent criticism over conflict of interest and other ethical questions, particularly since an op-ed in the New York Times by a former Goldman Sachs banker whose critique of a culture of greed went viral.


DRIVING ADS UNDERGROUND

Some law enforcement authorities say that of the hundreds of websites that host adult ads, Backpage is the most high-profile.

"In every case of sex trafficking that the Brooklyn District Attorney has, the girl was involved with Backpage.com at some point or another," said Jerry Schmetterer, spokesman for Brooklyn District Attorney Charles Hynes.

But McDougall, who was hired by Village Voice Media in February after representing Craigslist during the controversy that led the site to shut down it's adult section, rejected demands that the site shut down its adult section.

She said to do so would be 'counter-productive' to law enforcement efforts to investigate and prosecute child prostitution and sex trafficking, in that it would drive the ad traffic to host sites that operate offshore, outside the reach of U.S. authorities.

McDougall said that Backpage.com cooperates extensively with law enforcement and missing children groups.

In 2011, Backpage.com reported 2695 cases of suspected child trafficking to the National Center for Missing and Exploited Children, according to January, 2012 testimony of NCMEC president Ernie Allen.

Backpage.com also posts lists for hundreds of other classified advertising throughout the country.

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