Citadel to slash E*Trade stake

NEW YORK (Reuters) - Citadel Investment Group, the hedge fund giant that has twice injected capital into struggling online brokerage E*Trade Financial Corp (ETFC.O), said on Thursday it will slash its investment by more than two thirds over the next few months.

The Chicago-based firm plans to sell 120 million of its 166 million E*Trade shares through an insider stock-trading plan registered with the Securities and Exchange Commission. The sales will leave Citadel with about a 4.1 percent stake when the plan concludes at the end of October.

Citadel founder and Chief Executive Kenneth Griffin, who was added to the E*Trade's board on June 8, intends to remain a director. Citadel said it will maintain significant holdings in the broker's debt and will likely emerge E*Trade's largest stockholder after the sales.

Citadel reported a 14.9 percent stake in E*Trade as of Monday.

In a filing on Thursday, Citadel said it sold nearly 14 million E*Trade shares on Monday and Tuesday for $19.4 million, leaving it with 120.4 million shares.

The hedge fund manager intends to sell some E*Trade stock daily, under the terms of the plan, although never below the price of $1.20 a share. E*Trade's stock fell 4 cents, or 2.7 percent, to $1.42 a share in midday trading.

Citadel spokeswoman Devon Spurgeon declined to comment.

CUTTING LOSSES

E*Trade was a high flyer of the 1990s Internet stock boom and it smartly sidestepped the bursting tech bubble with its 2000 acquisition of Telebanc, an online bank that tapped into surging mortgage markets. But since 2007, E*Trade has suffered a string of losses as debt markets broke down.

Citadel agreed to rescue E*Trade at the end of November 2007, investing $2.5 billion for a portfolio of distressed mortgage assets, senior notes and a 20 percent equity stake. At the same time that sovereign wealth funds were injecting capital into hard-hit banks, Citadel snapped up E*Trade shares that were down 81 percent from their 2007 highs.

Unfortunately for Griffin, renowned as a savvy trader, E*Trade shares began to plunge and went on to lose another 70 percent of their value.

By June this year, E*Trade needed another rescue. Under pressure from U.S. regulators to shore up its depleted capital. E*Trade sold about $400 million of new shares and exchanged $1 billion of zero-coupon convertibles for high-cost debt.

Citadel, already E*Trade's biggest debt and equity holder, bought $100 million of the new E*Trade shares for about $1.10 a share and raised its stake to 17 percent.

Now E*Trade's prospects appear to be brightening, analysts said. Credit weakness may have peaked, while investor demand for online brokers is rising.

"We suspect the selling of shares by Citadel reflects issues of diversification rather than fundamental concerns about E*Trade," Sandler O'Neill analyst Richard Repetto said in a client note. "E*Trade's fundamental story has improved."

Sandler's Repetto estimated Citadel, despite the upcoming stock sales, will with its convertible debt holdings have beneficial control of 37.2 percent of E*Trade.

Citadel also disclosed it sold $200.6 million of "springing lien" notes, which are equivalent to 194 million common shares, between July 30 and Aug 10.

(Reporting by Joseph A. Giannone; editing by Derek Caney and Andre Grenon)