Paul Ponting, 48, was stripped naked and "intimately searched" by officers at Skelmersdale Police Station, before they left his cell.
Horrific footage shows Mr Ponting appearing terrified and curled into a ball in the corner of the cell, naked, as one officer intimidatingly stands over him.
He became so stressed during the horrific ordeal, he was rushed to a hospital from his cell suffering from chest pains.
The IT businessman was later taken to Wigan Hospital, where medics recorded his "multiple bruises, superficial lacerations to the limbs and his swollen left lateral hand".
In a dramatic turnaround of events, Mr Ponting was charged with assaulting the officer who arrested him, and harassing another officer.
He told the Liverpool Echo: "They started dragging me across the road to a pub car park where the police van was parked.
"I was pepper sprayed in the face and dragged along the pavement, suffering cuts to my body.
He added: "People have this view of the police that they are always right and they are never wrong, and don't get me wrong they do a great job in a lot of areas, but they're not perfect and they can be pretty evil when they want."
He was cleared of all charges following a trial at Chorley Magistrates' Court, with the bench criticising the arresting officer following a four year legal battle with Lancashire Constabulary.
The force decided not to fight a civil claim for wrongful arrest, false imprisonment, assault and malicious prosecution.
Officers were scrambled to Mr Ponting's home on June 18 2014 at 10.30pm.
He argued with Sgt Hayes and PC Ward, who told him they would not be pursuing a case against a man he claimed had harassed him.
In the midst of their heated conversation, Hayes sprayed PAVA spray in Mr Ponting's face with Ward wrestling him to the floor.
The pair dragged him into a van as Mr Ponting's two young kids watched from a window.
Mr Ponting was left with cuts, bruises and a number of minor injuries following the struggle.
Notes recorded by Chorley magistrates highlighted that an arrest was not required because Mr Ponting's "behaviour was not threatening".
Lancashire Police confirmed it had settled the case without liability, which means it made no formal admission of wrong doing.
The settlement does include a letter of apology.
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