Editors note: Mountain View's Posh Bagel on Castro Street is not owned by the suspects mentioned in this story. This updated story corrects errors from a previous version of the story published online Monday.

The owner and founder of several Bay Area bakeries has been arrested on suspicion of failing to report employee injuries and accurate hours worked, according to the California Department of Insurance.

Posh Bagel founder Jeffrey Michael Ottoveggio, 48, and his wife Cheryl Ann Lee, 39, were arrested Thursday at their home in Redwood City for workers' compensation insurance fraud.

The company's accountant/controller, 54-year-old Bruce William Campbell, was arrested at his home in Palo Alto.

Ottoveggio founded Posh Bakery and Posh Bagel. The company has 14 retail locations in all, including those in San Francisco, Santa Clara, Los Altos and San Jose. The Mountain View store is independently owned and operated by Chuck Whelan.

"The guys that own Posh are apparently bad actors," Whelan said Tuesday. "We buy two products from them, that is the extent of our affiliation."

Between January and September 2006, the company had an insurance policy with a subsidiary of Applied Underwriters. Payrolls were reported to Applied Underwriters on a bi-weekly basis so the insurance company could determine premiums for workers' compensation insurance, according to the insurance department.

In June, Applied Underwriters received an internal spreadsheet that contained two payroll records - one for Applied Underwriters and one for a second company. The sheet showed fewer hours were being submitted to Applied Underwriters.

The California Department of Insurance then launched an investigation and found Posh had underreported more than $1.6 million worth of earnings to Applied Underwriters.

The department also found Posh did not report two employees who cut themselves while cutting dough and needed sutures, injections and prescription medication.

The suspects were booked into Santa Clara County jail, and bail was set at $500,000 each.