Takafumi Horie, who shook up corporate Japan with his ruthless business tactics and flashy lifestyle, was arrested with three other executives.
It is alleged that Horie had sought to boost share prices by spreading false information, issuing new shares to "acquire" firms already under Livedoor's control and then selling them for a profit to pad its books.
A raid on Livedoor by authorities a week ago sparked chaos on the Tokyo stock market and sent share prices plunging across the board on huge volume that caused the market to halt trading.
New Japan icon
Horie said in his web diary on Sunday that he had no recollection of Livedoor doing anything illegal.
The podgy 33-year-old became an icon of a dynamic "New Japan" after a spurned attempt to buy a baseball team in 2004 and a takeover battle with a giant media group last year made him a household name.
Also arrested were Ryoji Miyauchi, the chief financial officer, and Fumito Okamoto and Osanari Nakamura, both directors.
Officials at Livedoor were not immediately available for comment on the arrest.
Investors' fears that other IT firms might also have fudged their books sparked a flood of sell orders in Tokyo last week, causing prices to plunge and swamping the bourse's computer system.
Livedoor stock has been put on a watch list on the Tokyo exchange and has lost about 64%, or $4 billion, in value since the raid on its headquarters a week ago.
Livedoor's portal, www.livedoor.co.jp, is one of Japan's most popular websites, but the group has a portfolio of nearly 50 internet-related businesses ranging from consulting and software companies to network management, e-commerce and e-finance firms.