Chinese authorities are investigating allegations that a private security company colluded with local officials to lock up protesters in secret prisons known as black jails.
Human rights groups say that China has hundreds of such jails and that detainees are often subject to abuse, but the Chinese government has repeatedly denied they exist.
State media say police have arrested the chairman and general manager of Anyuanding Security Services, the BBC reports.
It is alleged they took money from local governments to abduct and imprison people who travelled to the capital, Beijing, to complain about local injustices - a practice that dates back to imperial times.
The company denies this.
Reports say the company charged local and provincial governments up to 300 yuan ($60) per person per day for apprehending and detaining them, in a business said to have earned the firm more than $4 million in 2008.
Petitioners claim to have been locked up for weeks or months - stripped of mobile phones and identification - until being sent home. Some say they were physically abused while in detention.
'Only the tip of the iceberg'
In a report released last November , Human Rights Watch interviewed 38 people who said they had been victims of forced detention when attempting to lodge complaints with central authorities. Some said they were beaten.
Phelim Kine, Asia researcher for Human Rights Watch, told AFP news agency that the police investigation was an "encouraging development" but that the case is only the tip of the iceberg.
"The fact is that the problem of black jails goes far beyond one company," Mr Kine says.
"It involves a web of government officials, security forces, huge numbers of plainclothes thugs and dozens of facilities in Beijing alone."