* Discount broker's biggest investor dumps 9.6 pct stake
* E*Trade shares outstanding will not be affected
* Citadel made more than $800 mln from E*Trade - sources
By Jed Horowitz
NEW YORK, March 13 (Reuters) - Citadel LLC, the largest investor in E*Trade Financial Corp, is selling its entire stake in the discount brokerage and bank company.
E*Trade said on Wednesday that Citadel, a Chicago-based hedge fund company that began investing in the company in November 2007, is selling its 27.4 million shares on or about March 19 to Citigroup Inc in an underwritten offering.
Citadel, whose founder Ken Griffin has tried for years to convince his fellow E*Trade board members to sell the company, confirmed the sale.
New York-based E*Trade said it will not share in the proceeds and that the deal will not affect the total number of common shares outstanding.
Citadel began to bail out of E*Trade five years ago as it struggled with massive losses from mortgage lending by its bank unit. The hedge fund's investment in stock and convertible debt reached 40 percent of E*Trade on a fully diluted basis at its peak, but has been whittled down since 2009.
Citadel realized well over $800 million from its debt and equity investment, according to people familiar with the investment.
E*Trade, which has had seven chief executives since 2007, is returning to its roots as a discount brokerage and winding down its bank loan operations. It reported earlier on Wednesday that it has reduced its loan portfolio by 3 percent this year to $10.3 billion and by 68 percent from its peak in 2007.
Like other discount brokerage firms, it continues to struggle with relatively low trading volumes and rock-bottom interest rates. Average daily trades by customers fell 10 percent in February from a year earlier and 1 percent from January.
Spokespeople at E*Trade and Citadel did not know if Griffin would remain on the board. E*Trade, which elects all of its directors in May at its annual meeting, said last week that its chairman and two of its directors are stepping down at the board meeting. Griffin was not among the directors named.
E*Trade shares, which have risen about 30 percent this year, fell 4.8 percent in after-hours trading to $11.25 following the announcement of the Citadel sale. (Reporting by Jed Horowitz. Editing by Andre Grenon)