Your current employer is probably not the one who controls your 401(k). Most businesses have someone else as trustee for the retirement accounts, usually a brokerage firm. They are the ones who will allow or disallow any requests, and they have to do so under the 401(k) contract and within federal law.

My current employer IS the plan administrator for our 401K

No, I don't believe a rollover can be denied, if you request it. They can certainly make it very difficult by not sending you the proper paperwork, or really dragging their feet during the process. Everything you've put into the account, they should have to allow you to draw out and rollover into a qualified 401k or IRA elsewhere.

It is possible to take away employer contributions. If they made any to your account during this time, you might not be considered fully "vested" in the funds. If so, then you'll lose all of your employer contributions.

Shady or not, I don't see how the old employer and the 401k plan administrator can hold your money hostage. They don't own it. I wouldn't worry very much about it, and get a rollover going as soon as you're out the door. Doing it sooner, rather than later, will also protect you from issues that might crop up with taxation.

Thanks very much for the soothing reply Bernie Madoff has nothing on the guy I work for!