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"We've learned that the government is pressing ahead to prosecute, and this phase of the case is swiftly coming to a conclusion," a source told PEOPLE.
Investigators believe that money from outside political groups and Edwards's donors was paid to Hunter and onetime aide Andrew Young to keep the affair and love child a secret.
An attorney for Edwards, Gregory Craig, confirmed the government is preparing a criminal case.
"John Edwards has done wrong in his life ? and he knows it better than anyone ? but he did not break the law," says Craig, according to The Washington Post. "The Justice Department has wasted millions of dollars and thousands of hours on a matter more appropriately a topic for the Federal Election Commission to consider, not a criminal court."
A source close to Edwards says he has, in recent weeks, appeared despondent over the case and isolated himself at the family's sprawling Chapel Hill, N.C., home, where he is sole parent to his two young children, Emma Claire, 13, and Jack, 11.
Hunter, meanwhile, lives in Charlotte, N.C., with her daughter Quinn and continues to have contact with former senator, a source tells PEOPLE.
"Rielle and John are raising their daughter together," a source close to Hunter says.� "John sees Rielle and Quinn regularly."
As for Hunter and her daughter, the source tells PEOPLE: "She is doing okay. She doesn't dwell on the negative and is a glass half full kind of person. She is focusing on her daughter."
? Reporting by SHARON COTLIAR AND LIZ MCNEIL