HTC staff arrested on Friday for allegedly stealing trade secrets may have also passed on confidential information to a Chinese governmental body in exchange for help setting up a rival smartphone company.

Last week, three design executives from Taiwanese smartphone maker HTC were arrested on suspicion of leaking corporate secrets . HTC's vice president of product design Thomas Chien, research and development director Wu Chien-Hung and senior manager of design and innovation Justin Huang allegedly stole "key interface technology" from the firm in order to set up their own smartphone design company, possibly in order to sell the data to rival Chinese companies.

However, according to Next Magazine, the executives were also passing on confidential data to the government of Chengdu city in China.

In exchange, the city government promised to pay for the majority of set-up, operation and marketing costs associated with setting up the new smartphone design firm the publication says, citing prosecutors. Next Magazine does not say whether the employees were successful in passing along specific trade secrets, or how the city government was planning to use the information.

A Chengdu city government official said: "We're not clear about this and have not seen this report."

While all three deny the accusations, HTC has also accused the executives of illegally claiming over $330,000 in false design fees. Chien and Wu are still in custody, while Huang has been released on bail.

The Taiwanese smartphone maker's shares have suffered as a result of the arrest, which has added to the firm's disappointing sales over the past year and departure of key executives. HTC has predicted an operating loss in Q3 due to the high cost of building the flagship smartphone HTC One, following Q2 results registering a net income slide of 83 percent to NT$1.25 billion ($41 million). HTC CEO Peter Chou has promised to improve profitability in the future.