You're the boss.
Your immediate report is the competent VP/Engineer.
His report, the company's best dev, is the one who committed the personal-life transgression against him.
The two will never work together well again. Now what?
What if everyone else finds out the the employee had an affair with the boss and the boss knew and the boss didn't fire him?
I'd honestly have trouble respecting the boss in that situation. This holds even if I were good friends with the guy who got fired. If one of my pals got caught having sex with his boss' wife and he got fired, I'd laugh because what the fuck man, why the would you ever even consider doing that? I wouldn't fault the boss at all, even if I otherwise thought he was a prick.
Like if they were all just consensual swingers that's fine with me. Not my thing, but to each his/her own. But based on what the guy wrote it doesn't sound like that is the case at all.
In this story the wife asks the husband to fire the very competent & sexy assistant. He does and the court rules in his favor... because she was a cause for distraction (simplified). I don't agree with this ruling since the assistant did not do anything wrong.
If him being around makes your life miserable, fire him (check with a lawyer first). He's obviously a cause for distraction, you're going to have a hard time trusting him and you are probably having a hard time focusing around him.
US courts have ruled very consistently on this point.
You'd consider canning the _competent_ VP/Engineer, adding insult to injury?
C'mon.