updated 1/23/2006 9:48:52 AM ET 2006-01-23T14:48:52

Japanese authorities on Monday arrested Takafumi Horie, the chief executive of Internet portal Livedoor Co. at the center of a financial fraud probe that has roiled Tokyo’s stock market, prosecutors said.

The investigation into Livedoor also spread to Japan’s political sphere Monday, with politicians grilling Prime Minister Junichiro Koizumi over his political support of Horie, a brash, young entrepreneur who had run for a parliamentary seat last year.

The arrests of Horie and three other executives culminates a weeklong investigation into Livedoor Co. which began with a surprise raid on its Tokyo headquarters and 33-year-old Horie’s home last Monday.

The probe triggered a sell-off on Japan’s stock market, where the benchmark Nikkei 225 index fell 2.14 percent Monday. Since the start of last week, the index has plunged 6.7 percent.

Tokyo prosecutors said Horie and the three others were arrested on charges of spreading false information to inflate stock prices. Prosecutors said in a statement that they had given false information about Livedoor’s affiliate companies to cover up losses at a subsidiary and boost its own stock price.

Horie, who has become a TV star in recent years for his bold buyouts and for challenging the stodgy business elite, has repeatedly denied wrongdoing.

“I have no recollection on any of the allegations. And I don’t even know how to comment because I have no idea what kind of investigation the media reports are coming from. That’s the situation,” Horie wrote in his blog over the weekend.

Arrested with Horie on Monday were Ryoji Miyauchi, Fumito Okamoto and Osanari Nakamura, all 38-year-old Livedoor executives.

Horie’s arrest is certain to be a blow for his fans, including many individual investors and youngsters, who had looked toward the unpretentious T-shirt-donning university dropout as an inspiration for a new kind of managerial leadership and glamorous lifestyle.

Horie had been widely seen as the face of a new corporate Japan — the antithesis of the stereotypical docile Japanese salaryman who unquestioningly takes orders and clings to jobs under a tradition of lifetime employment that has increasingly been cast off amid global competition and cost cuts.

The arrest, however, is proving to be a major embarrassment for Prime Minister Koizumi because of his party’s backing for Horie in last September’s elections.

During the campaign, top party officials stumped for Horie, who ran as an independent but clearly had the party’s support. What he symbolized seemed to fit well with Koizumi’s appeal for broader economic reform and fostering entrepreneurship.

Horie ended up losing his particular race in what turned out to be a landslide victory for Koizumi.

But with Horie now mired in a scandal, opposition politicians have been quick to seize the opportunity to attack the prime minister.

At a parliamentary session prior to Horie’s arrest, Seiji Maehara, leader of top opposition Democratic Party, accused the ruling party of exploiting his fame and saying it now has some serious explaining to do to the public.

“The Liberal Democratic victory is mere window-dressing that exploited such candidates” Maehara told legislators. “The prime minister and the ruling party cannot avoid ethical questions. The prime minister must apologize to the people.”

Koizumi merely replied that the government was still monitoring the case because it was still under investigation.

News of the probe broke last Monday, when prosecutors raided Livedoor’s offices and Horie’s home on suspicion the company spread false information related to its takeovers. Media reports have also said the company is accused of hiding losses.

The Tokyo Stock Exchange placed Livedoor shares under a warning late Friday for not disclosing enough financial details about the recent allegations. The exchange is likely to consider delisting Livedoor if it’s unable to answer to the allegations.

Shares in Livedoor plunged to 256 yen ($2.20) on Monday, down the maximum amount of 80 yen (69 cents) that a stock of its price is allowed to fall for the day. A week ago, they were trading at 696 yen ($6.03).

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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