Gu's sideline business took off, so he quit Baidu in 2007 and set up Beijng Yage Time Technology Ltd. He later changed its name to Yage Time Advertising and registered the firm under the name of his wife, the chief financial officer.
Yage's clients ranged from small, private companies to heavyweights such as China Mobile and FAW-Volkswagen, the joint venture set up by German carmaker Volkswagen and Chinese counterpart First Automobile Works. Foreign concerns, including Pizza Hut and the Japanese restaurant chain Yoshinoya, also hired Yage.
But Yage's best clients were local government officials. They were generally eager to pay for his help with building a positive image and a clean record on the Internet.
A former Yage staff member said about 60 percent of the company's profits came from business with officials from second- and third-tier cities. These clients included many police chiefs.
(Read More: China Tells Its Own Officials to Avoid Sex Scandals)
As part of Gu's strategy, dozens of Yage staffers spent the workday surfing the Internet in search of negative news, comments and postings about government officials. Any official whose reputation seemed to be threatened would be contacted and offered Yage's services as soon as negative information surfaced online.
High season for Yage's business with local government clients was usually just before the National People's Congress and China People's Political Consultative Conference held every March in Beijing. It's around conference time that officials typically come under attack from whistleblowers. It's also when these officials are often willing to pay a premium to see negative publicity vanish.
A former Yage staffer recalled that Gu once announced at an internal meeting that a deal with a nervous government official was worth no less than 500,000 yuan.
Yage's cream of the crop employees built good client relations with government officials. These included a dozen hand-picked by Gu and carefully trained so they could successfully pitch the company's services to even high-ranking officials.
Gu also found ways to profit from value-added services. For example, after scrubbing negative content for a client, Yage sales staffers often recommended Internet surveillance software that could be used to self-monitor web forums. Yage could buy a single software license for 100,000 yuan and sell it to a gullible client for 400,000 yuan.
(Read More: Why Online Privacy Is a Big Oxymoron)
At the other end of the food chain were website operators and administrators – and in some cases government-linked Internet censors – with the power to delete information after it was posted on the Internet.
Gu and others at Yage cultivated personal relationships with front-line website operators, mainly by wining and dining but sometimes by offering a bribe, in exchange for having certain posts deleted.
In 2009, web forum operators and other public relations companies started adopting a similar business model by arranging to delete online information for fees.
A website administrator's fee for cutting a single website post could cost hundreds of yuan. And a public relations company that worked as a mediator between a website administrator and a customer could charge thousands of yuan per scrubbed post.
Soon, an entire industry emerged with standard pricing for deletions and related services.
(Read More: China Tightens Internet Controls, Legalizes Post Deletion)
The Shenzhen private equity firm paid Yage 1 million yuan to have all negative publicity erased from the Internet, said a former Yage employee. Ten Yage staffers accomplished the task by tracking down every relevant media outlet and having each delete negative news articles about the firm, one by one. They also got news aggregators and web forum operators to remove re-posted pieces.
Yage staffers used any means at hand to get the job done. In the end, the former Yage employee said, the company profited heavily after handing out a mere 10,000 yuan in payoffs in exchange for cooperation from website administrators and media site editors.
Gu also found a way to exploit the rules of the road on China's Internet in ways that saved time and money: He got websites with which he had no direct contact to clean up re-postings about Yage clients simply by presenting a formal letter from the company or its public relations firm saying that the original publisher had altered a particular news item.
Another Yage secret to success was its ability to get search engine administrators, including some at Baidu, to tweak key word filtering so that a search using that word would show none of the articles in which it appears. A former Yage employee told Caixin the company used to be able to take advantage of personal connections at Baidu to have certain words filtered for clients.
But nothing worked better than building good, personal relations with the website editors and operators who are allowed to have their fingers on the delete button. These relations were further stoked via social networks whose members worked for Yage and similar companies.
(Read More: The Key to Staying Successful Online: Silicon Valley CEO)
Major Internet companies started taking note of the scrubbing activity, prompting some to tighten rules. Major news portals such as Sina, Tencent and Netease, as well as niche sites such as Hexun, started to more closely scrutinize the editing process that follows web post publishing. Any unauthorized deletion of website information at these companies could cost a person his or her job.
News website operators maintain regular contact with Beijing city government officials at the Internet Management Office. All parties hold a regular meeting every Friday, and through the course of each week officials use phone calls or text messages to convey specific orders, including any orders to filter out key words from search functions.
Officials close to the Haidian police probe and raid told Caixin that some government officials use these official order channels for personal benefits. Indeed, last year police arrested a staff from Beijing's Internet Management Office for alleged bribery.
Also during last year's clampdown, two Netease employees were arrested for allegedly accepting bribes. And four Baidu employees were arrested on similar charges.
Among those rounded up at Baidu was a man surnamed Xu who authorities said deleted 76 posts on the night of May 29, charging 300 yuan per scrub. He kept 70 percent of that money and handed over 30 percent to a mediator.
Arrested with Gu was Hu Chunyu, the financial news channel chief at Qianlong, a website tied to state-run media including the Beijing Daily newspaper, the Beijing Radio Station and Beijing TV. The site is managed by the Propaganda Department at the Beijing Municipality's Communist Party Committee
(Read More: China's Spin Doctors Have a New Tool—Online Gaming)
Hu's fall followed a three-year effort at Qianlong to improve the company's bottom line by allowing Yage to carry out public relations projects.
These projects involved public relations companies that would produce or re-post pieces that smeared companies or at least threatened their reputations, have them posted on Qianlong, and later have the pieces removed after the targeted company paid a fee.
A few years after its founding in 2000, Qianlong started outsourcing part of its news production to public relations companies. In 2009, Yage won a more than 100,000 yuan-a-year contract to supply business channel content. Yage also won the right to post and delete articles on that web page.
Yage at first posted advertorials disguised as news. Later, the Qianlong business site started a "Company Black List" section with hundreds of negative reports about various firms beside an advertisement offering Yage's Internet firefighting services.
Several companies like Yage also won access to the website and started their own means of extortion. A manager at an education company told Caixin his company once paid Yage to delete a negative news piece appearing on Qianlong, but then had to pay another public relations company after the same news appeared elsewhere on the website.
"You can't stop negative news on Qianlong," said a communications officer at an e-commerce company.
"Once you (pay) to have a piece removed, they'll see you as having deep pockets and come back again and again.
"We think Qianlong is shameless," the source said. "But you really can't cross it. It's still one of the Beijing government's official propaganda portals."
So far, Hu has been the only target of the police probe into Qianlong. Coincidentally, he has a relative who works for the Beijing government's Internet office.
(Read More: Russia, China Back Down on Proposals to Regulate Internet)
Web-data deleting first turned heads in 2010, when state-run CCTV television broadcast an investigative report about Yage and its dark deals. But authorities took no action. In fact, Yage's business surged after the broadcast because it taught companies and government officials that they could actually buy a positive online image.
That same year, Gu set up another public relations company called Xinxun Media Ltd., which focused on advertorials and charged clients for positive news spinning.
Yage continued to function as a cash cow. An industry insider told Caixin Yage's 2011 revenues exceeded 50 million yuan. Xinxun and Yage shared an office, and the former relied on the latter to provide clients. Whenever speaking in public, though, Gu identified himself as a Xinxun executive.
The Haidian police raid targeted Xinxun as well as Yage. Employees from each company were detained. No dates have been announced for court hearings.
Meanwhile, despite the crackdown, nothing has changed about the online image of what may be China's most successful Internet scrubber. A Baidu search for "Yage" still yields a list of websites that carry the company's advertisements and slogans such as "Yage Time professionals help you delete negative reports" and "key word filtering: a solution to anything negative."