By Joseph Ax

NEW YORK, Sept 27 (Reuters) - A former Goldman Sachs Group Inc computer programmer indicted on charges of stealing trade secrets has rebuffed a plea offer that would keep him out of prison, his lawyer said on Thursday.

Sergey Aleynikov, 42, was formally indicted Thursday on New York state criminal charges of stealing proprietary trading code from the bank. The indictment is the latest development in a years-long legal battle between Aleynikov and federal and state prosecutors.

Manhattan Assistant District Attorney Joanne Li told State Supreme Court Justice Ronald Zweibel that her office had offered Aleynikov a sentence of time served in exchange for a guilty plea. Under the proposed deal, he would not have to serve additional prison time beyond the roughly one year he already served following his conviction on federal charges.

Aleynikov's lawyer, Kevin Marino, said his client had rejected the offer. Marino told the judge he would move to dismiss the case based on double jeopardy - prosecution twice for the same offense - and accused state prosecutors of having "no sense of decency."

"The precise factual circumstances that underlie these charges have already been fully adjudicated," he said. "There's nothing remotely lawful or constitutional about what's going on ... He left Russia for freedom and the American way, and he got Franz Kafka and Goldman Sachs."

The Aleynikov prosecution has been closely watched as U.S. authorities are on a push to tackle complex cyber crime, an area of criminal law that has not been well-tested in courts amid debate about which laws apply and what types of conduct can be considered criminal behavior.

Prosecutors have accused Aleynikov, a dual citizen of the United States and Russia, of stealing code used in Goldman's high-frequency trading system in 2009 before leaving to join Teza Technologies LLC, a rival start-up in Chicago.

He was arrested in August and charged by New York state prosecutors, six months after the 2nd U.S. Circuit Court of Appeals overturned his 2010 federal conviction on charges tied to the same conduct.

Aleynikov had served nearly a year of an eight-year prison sentence before the appeals court ordered him released. If convicted in state court, Aleynikov could face up to four years in prison.

His conviction was reversed in part because the appeals court said the Justice Department failed to show that the stolen code was intended for "interstate commerce," a necessary element under the federal Economic Espionage Act.

Aleynikov entered a plea of not guilty Thursday to two counts of unlawful use of secret scientific material and one count of unlawful duplication of computer-related material.

Li, the prosecutor, said the case does not violate double jeopardy and pointed out that Marino himself suggested in federal court papers that this type of offense is more properly prosecuted in state court.

In a statement, the head of the Manhattan District Attorney's cybercrime unit, David Szuchman, said the appeals court "very clearly" suggested that Aleynikov's conduct could violate state law. He rejected Marino's contention that his office was acting as a proxy for the Justice Department in renewing the prosecution.

"On our own initiative, we contacted federal prosecutors and asked for their cooperation in filing a state criminal case to make sure this defendant was held accountable for his criminal conduct," he said. "Any suggestion that we filed these charges for any other reason is false."

Earlier this week, Aleynikov sued Goldman in New Jersey federal court for $2.4 million in legal fees, demanding that the bank cover his costs of fighting the federal prosecution. The lawsuit claims Delaware law and the bank's bylaws entitle corporate officers to indemnification when they successfully defend themselves against charges.

Aleynikov will remain free on $35,000 bail. Prosecutors will permit him to travel to Russia for approximately one month to visit his mother, who is undergoing cancer treatment.

The case is People v. Aleynikov, New York State Supreme Court, New York County, No. 60353/2012.

For the prosecution: Assistant District Attorney Joanne Li.

For Aleynikov: Kevin Marino and John Tortorella of Marino, Tortorella & Boyle.

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