*Criminal probe may go away but civil charges possible
*Joseph Cassano headed AIG Financial Products
WASHINGTON/NEW YORK, April 5 (Reuters) - The former head of the American International Group (AIG.N) division that nearly bankrupted the giant insurer isn't out of the woods yet.
Joseph Cassano, who ran London-based AIG Financial Products and oversaw its disastrous accumulation of credit default swaps, looks likely to dodge criminal prosecution after nearly two-years of investigation, according to media reports.
But U.S. securities regulators will continue to investigate whether he should face civil liablity, even if prosecutors drop the matter, according to people familar with the probe.
As recently as mid-March, prosecutors and lawyers from the Securities and Exchange Commission interviewed potential witness in the investigation, sources said.
They also confirmed that prosecutors were nearing a decision on whether to pursue criminal charges, but cautioned that no final judgment had been made.
Cassano is the former chief executive of AIG Financial Products, which nearly brought down AIG in September 2008 after writing tens of billions of dollars worth of insurance-like contracts on complex securities backed mortgages that turned out to be toxic.
The U.S. government stepped-in with a $182 billion bailout to avert a bankruptcy filing by AIG and stave-off an even worse global financial crisis.
Cassano resigned under pressure in March 2008, as AIG's financial situation began to weaken. His defense attorney, Joseph Warin, declined to comment on the reports that his client probably won't face criminal charges.
Representatives of the Department of Justice's financial fraud division and Brooklyn U.S. Attorney Ben Campbell also declined to comment.
While Campbell's office and federal prosecutors in Washington have been jointly investigating the AIG collapse, sources said the Washington-based ones have taken the lead.
Given the high-profile nature of the AIG bailout and the controversy swirling around the insurance-like contracts, the SEC is under pressure to hold some Wall Street executives accountable for the worst financial crisis since the Great Depression, legal sources said.
Other sources said that since regulators do not have to meet the same burden of proof as prosecutors, the SEC is not bound by whatever determination prosecutors make.
"It will have no bearing on the SEC," said a criminal defense attorney who declined to be identified.
To prove civil fraud, the SEC needs only to show that the defendant was reckless. That is a much easier standard than having to prove someone intended to commit a crime.
Speculation that prosecutors may be nearing a decision in the matter was fueled this weekend when CBS News reported late on Friday that federal investigators had been unable to uncover evidence that Cassano had lied to his bosses or shareholders about financial problems at AIG.
The television network quoted the sources as saying the criminal case had "hit a brick wall."
Both CBS and the Wall Street Journal reported that Cassano was expected to meet with prosecutors this week.
For nearly two years, the FBI and other government agencies have been looking into whether Cassano misled investors with overly optimistic forecasts about the extent of the firm's exposure to securities backed by risky subprime mortgages.
Investigators were said to have focused on a December 2007 investor presentation at which Cassano played down the market-value of losses on its credit default swaps.
Over the course of the next year, AIG took writedowns of more than $40 billion on the swaps and had to put up billions more in collateral to counterparties like Goldman Sachs (GS.N).
The Journal, citing people familiar with the matter, said authorities wanted to discuss Cassano's reasons for making a "negative basis adjustment" that allowed AIG to reduce the amount of write-downs tied to the swaps.
The paper said Cassano's lawyer had presented evidence that AIG's auditor, PricewaterhouseCoopers, was aware of the adjustments.
Criminal defense lawyers said that if AIG's accountants signed off on the decision, it would be difficult to prove that Cassano had criminal intent.
"In a majority of white-collar cases, the primary issue is intent," said Steve Levin, a former federal prosecutor.
"The government can usually prove that an act occurred, but it's not as easy to prove that the act was committed with a criminal intent."
(Reporting by Dan Margolies. Additional reporting by Grant McCool in New York; Editing by Ted Kerr)