The Tokyo prosecutors confirmed Horie and three other Livedoor executives were arrested on alleged securities law violations. Prosecutors said in a statement that they had given false information about its affiliate companies to cover up losses at a subsidiary and boost its own stock price.
The arrest 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 and in Japan's stock market.
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 Monday were Ryoji Miyauchi, Fumito Okamoto and Osanari Nakamura, all 38-year-old Livedoor executives.
The probe had triggered a sell-off on Japan's stock market. Since the start of last week, the index has plunged 6.7 percent.
The investigation into Internet startup Livedoor Co. spread to Japan's political sphere Monday, with politicians grilling Prime Minister Junichiro Koizumi over his support for the brash, young entrepreneur at the center of the scandal.
And Horie's arrest is certain to be a blow for those, 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 stereotype docile Japanese salaryman, who unquestioningly took orders and clung to their jobs under a tradition of lifetime employment that had increasingly been cast off amid global competition and cost cuts.
The arrest, however, is proving to be a major embarrassment for Koizumi because of his party's backing for Horie in last September's elections.
During the campaign, top party officials stomped 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 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.
"It's a big well-known Internet company. It was one of the high-flyers that people thought was doing really well, and it turns out it may have been playing with the books, much like Enron," reports CBS News correspondent Barry Petersen.
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.