According to police, Angelo Haligiannis, former president of the Sterling Watters hedge fund, was arrested while on holiday on the island, after a tip-off from someone who may have been a victim of his fraud.
Iraklio police chief, Pantelis Giannakopoulos, said: "The suspect was arrested this afternoon on a U.S. warrant for fraud, and is being held.
"We detained him and Interpol confirmed that he was wanted," he told The Associated Press.
Mr Haligiannis pleaded guilty to criminal fraud charges in a New York court in September 2005, but did not turn up for sentencing in January 2006.
The court found that Sterling Watters Group and Haligiannis had systematically defrauded investors by misrepresenting the fund's performance since 1996 - the fund had been promoted as being $180 million in assets, but in reality it was worth $170,000.
A civil lawsuit, brought by the US Securities and Exchange Commission, also accused Haligiannis of fraudulently raising at least $27 million from investors.
Police said that Haligiannis will face a prosecutor today (Tuesday).