May 10 (Bloomberg) -- Canadian police arrested and charged a retired federal bureaucrat and the head of a Montreal advertising company with fraud amid a probe into possible misspending of government sponsorship funds.

The former bureaucrat, Charles Guite, and Groupaction Marketing President Jean Brault face six counts of fraud and conspiracy by fraudulent means connected to transactions worth C$1.97 million ($1.41 million), Royal Canadian Mounted Police spokesman Michel Blackburn said in an interview.

The federal government's auditor reported in February that, between 1997 and 2001, the program sent C$100 million in commissions to advertising companies that did little or no work in return. The program was designed to shore up the government's image in Quebec after separatists almost won a 1995 referendum on the province splitting from the country.

Guite told legislators in Parliamentary hearings last month that he did nothing wrong. Guite's lawyer, Michael Edelson, is in court today and unable to comment, his secretary said. Brault didn't immediately answer a message left on his voicemail at Groupaction.

The scandal has weakened Prime Minister Paul Martin's popularity to the point where he may not win a majority government in an election he must call by November 2005. Martin was finance minister while the program operated and has said he would resign if a judicial inquiry he called found he hid knowledge of any improper spending. Martin took over from Jean Chretien in December.

In a secret hearing two years ago, Guite said he was ``at war'' against Quebec separatists and that forced him to bend guidelines for issuing contracts. That testimony was made public last month.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: May 10, 2004 12:52 EDT