TAIPEI (Reuters) - Three HTC executives, arrested on suspicion of leaking trade secrets, were illegally passing on confidential technical information belonging to the Taiwanese smartphone maker to the government of Chengdu city in China, Next Magazine reported.

In exchange for the information, the city government will pay for most of the set-up, operation and marketing costs of a company being established by HTC vice president of product design Thomas Chien, who led the design of HTC's flagship phone One, the weekly magazine said, citing prosecutors.

Taipei prosecutors had confirmed earlier that Chien, along with research and development director Wu Chien-Hung and senior manager of design and innovation Justin Huang, were detained on Friday. The arrests came in response to a complaint filed by HTC last month accusing the executives of leaking trade secrets.

It is unclear whether the executives actually succeeded in passing on any trade secret. Investigations are still ongoing.

Next Magazine did not explain how the Chengdu city government was intending to use the trade information but said it has set up a company involved in the smartphone business.

HTC and Taipei District Prosecutors Office declined to comment on the report.

An official at the Chengdu city government's media relations office said, "We're not clear about this and have not seen this report." She declined to elaborate.

HTC's Chien and Wu remain in custody, while Huang was released on bail, according to the prosecutors.

The executives were also accused of making false commission fee claims reportedly totalling as much as T$20 million (429,305 pounds).

The three men could not be immediately reached for comment.

Shares of HTC plunged 6.8 percent on Wednesday, the maximum drop allowed in a day, versus a flat broader market.

HTC - rocked by internal feuding, executive exits and a smartphone segment that is close to saturation - has seen its market share slump to below 5 percent from around a quarter five years ago.

(Reporting by Clare Jim; Additional reporting by Hui Li in BEIJING; Editing by Ryan Woo)

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