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The suspended chief executive of Caerphilly council and his acting successor have been arrested on suspicion of fraud and misconduct in public office, we can reveal.

The arrests come as part of an investigation being undertaken by Avon & Somerset Police into huge secret pay rises awarded to 21 senior officers of the council last year.

The rises followed recommendations made in a report by chief executive Anthony O’Sullivan.

A statement issued by Avon & Somerset Police said: “Following a request to carry out a review by the Wales Audit Office two people have been arrested on suspicion of fraud and misconduct in public office.

“They currently remain in police custody where they are being questioned.

“It would be inappropriate to comment further at this stage.”

Sources within the council have confirmed that the individuals arrested were Mr O’Sullivan and his deputy Nigel Barnett, who has been acting chief executive of the authority since his boss was suspended in March.

Both men were still being questioned last night, police confirmed.

After writing the report last year, Mr O’Sullivan’s own salary rose from £132,000 to £158,000 after the increases were approved by a committee of one Plaid Cymru and four Labour councillors. A further 20 senior managers including Mr Barnett also received a substantial pay rise, but the bulk of the council’s staff were on the third year of a pay freeze.

The rises were rescinded in January after a public outcry, and under a compromise Mr O’Sullivan’s increase went down from £26,000 to £5,000.

The chief executive was suspended in March on full pay after a report from the Assistant Auditor General for Wales, Anthony Barrett, said various aspects of the pay award were unlawful.

A spokesman for Caerphilly County Borough Council said: “We were informed this morning by Avon and Somerset Police that two senior council employees have been arrested and are being interviewed. We have been advised by the police it would be inappropriate to comment further at this stage, but we will continue to co-operate fully with the ongoing investigation”.

A Welsh Government spokeswoman said: “We are aware of these developments but as this matter is subject to a police investigation it would be inappropriate to comment.”

The Wales Office also did not wish to comment.

Avon & Somerset Police are conducting the investigation because Gwent Police was considered to be too close to Caerphilly council.