* Goldman intended to keep code secret

* No prosecution under Economic Espionage Act

By Grant McCool and Jonathan Stempel

NEW YORK, April 11 (Reuters) - A federal appeals court set back government efforts to prosecute alleged corporate espionage with an opinion that explained its recent decision to throw out the conviction of a former Goldman Sachs Group Inc computer programmer.

The 2nd U.S. Circuit Court of Appeals in New York said on Wednesday the alleged theft of source code by Sergey Aleynikov was not a crime under a 1996 law that makes it illegal to steal trade secrets. The court said the code did not qualify as stolen goods under another federal law.

"We decline to stretch or update statutory words of plain and ordinary meaning in order to better accommodate the digital age," Chief Judge Dennis Jacobs wrote for a unanimous three-judge panel.

On February 17, the 2nd Circuit set Aleynikov free after he had served 11 months of an eight-year prison term on charges that he had stole trade secrets from Goldman Sachs, the Wall Street investment bank.

Wednesday's opinion provided the legal reasoning for that unusual decision, which came just hours after Aleynikov's lawyer had argued in court to have his client's December 2010 conviction reversed.

"Prosecutors brought this case to send a message about economic espionage in the information age. This is a major setback," said Joel Reidenberg, a professor at Fordham University School of Law and director of the Fordham Center on Law and Information Policy.

FRESH SETBACK

The government had accused Aleynikov of copying and removing trading code from Goldman in 2009, just before taking a new job at Teza Technologies LLC, a high-frequency trading start-up firm in Chicago.

Aleynikov was criminally charged with violating the federal Economic Espionage Act and the National Stolen Property Act. Teza was not accused of wrongdoing.

U.S. Attorney Preet Bharara in Manhattan declined to comment, a spokeswoman for his office said. He has not said whether prosecutors will seek to reinstate Aleynikov's conviction.

Kevin Marino, a lawyer for Aleynikov, said, "We are extremely pleased with the 2nd Circuit's decision, which represents a complete repudiation of this prosecution."

Goldman spokesman Michael DuVally declined to comment.

Wednesday's decision was the government's second setback in fighting computer-related fraud in as many days.

On Tuesday, a federal appeals court in San Francisco said the government could not use the Computer Fraud and Abuse Act, an anti-hacking statute, to prosecute people who misused corporate data obtained legally. It said the government's broad read of that law could make it illegal to check email, use Facebook or surf the Internet at work.

STOLEN FORMULAS?

In the Aleynikov opinion, Jacobs wrote that the "highly valuable" source code at the center of the case was not physical "goods" or "wares" or "merchandise" within the meaning of the stolen property law.

Goldman "went to great lengths to maintain the secrecy of its system," Jacobs wrote. "The enormous profits the system yielded for Goldman depended on no one else having it."

Reidenberg said that while theft of trade secrets can be a state criminal offense, the 2nd Circuit's reasoning, if applied elsewhere, will shoulder companies with much of the burden to fight corporate espionage through civil lawsuits.

"Federal prosecutors will have a very difficult time treating theft of trade secrets as a criminal offense," he said. "It would be like someone trying to steal the formula for Coca-Cola. A court could, however, decide that the law could apply to a company keeping secret its plans for a new product, such as the next iPad, that will go into interstate commerce."

In a case similar to Aleynikov's, former Societe Generale trader Samarth Agrawal was sentenced to three years in prison in February 2011 for stealing speed-trading computer code secrets and transporting the code across state lines.

The case is U.S. v. Aleynikov, 2nd U.S. Circuit Court of Appeals, No. 11-1126.

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