07/02/2008 AT 09:30 AM EDT
Of all the dozens of victims dashing Italian businessman Raffaello Follieri allegedly duped, actress Anne Hathaway
fell the hardest, friends of the brunette beauty tell PEOPLE in its latest issue, on sale Friday.
After shooting to fame at 18 as a squeaky-clean Disney heroine in The Princess Diaries
, Hathaway, 25, thought she had found her Prince Charming in 30-year-old Follieri, telling PEOPLE in 2006 that he was a keeper. "You can say what you want about it, but we just love each other," the actress said at the time.
Even as some friends say they warned Hathaway about Follieri, she stuck by him for months as allegations of his wrongdoing
swirled. Last month, Follieri was arrested on charges of wire-fraud conspiracy and money laundering. Appearing in a Manhattan court on June 24, he was branded a "con man" by federal prosecutors, who accuse him of bilking investors of millions.
"She's a sweet girl, and he seemed like the right kind of guy," says a friend of Hathaway's. "At the end of the day, could she tell you that he was a dirty dealer? No way."
But when Hathaway learned that Follieri's charitable foundation was under investigation by the New York State attorney general for tax irregularities, the actress broke off the relationship. Says a pal: "That was the last straw."
In the aftermath, a source close to the star says her busy work schedule – last month she finished shooting the romantic comedy Bride Wars
with Kate Hudson
and she has been promoting her current comedy Get Smart
– has been a welcome distraction.
"Anne didn't mention [the breakup], and people around her didn't ask," says the source. "She was completely blinded on this one. She loved him and so she didn't see much else until now."
For the full story, including Hathaway's first impression of Follieri and their dinner with his parents a few weeks ago, pick up this week's PEOPLE, on newsstands Friday