UPDATE 2-E*Trade says former CEO to be paid $10.9 mln

(Adds detail on legal fee reimbursement, stock awards, severance payment timing, byline)

By Lilla Zuill

NEW YORK, Jan 2 (Reuters) - U.S. online brokerage E*Trade Financial Corp (ETFC.O) said on Wednesday that Mitchell Caplan, who stepped down as chief executive amid large losses in the company's mortgage business, is to receive $10.9 million in severance pay.

E*Trade also said that Caplan resigned from the board, effective Dec. 31. He stepped down as CEO on Nov. 29 at the same time E*Trade moved to mend its balance sheet with a $2.55 billion cash infusion from hedge fund Citadel Investment Group.

"Caplan's resignation ... effectively severs all ties with the company," E*Trade said in a statement released after market close. Caplan had been CEO since 2003.

E*Trade shares closed down 12 cents, or 3.4 percent, at $3.43 on Nasdaq on Wednesday. The shares have fallen about 87 percent since January 2006.

Caplan's severance payment is two times his 2006 base salary and bonus, according to the statement.

He will also receive two years of medical, life and disability insurance coverage, and reimbursement of up to $10,000 in legal fees related to the review and negotiation of his separation agreement, according to the filing with the U.S. Securities and Exchange Commission.

The $10.9 million is to be paid to Caplan as a lump sum within 30 days. He is also eligible to receive any vested or accrued benefits awarded during his employment, according to the filing.

Caplan's unvested awards will be terminated, and he will not receive any bonus for 2007.

"Caplan also released any and all claims against the company," E*Trade said in the filing.

The brokerage said it expects to name a new CEO in the next 30 days to 60 days. Jarrett Lilien, who had been chief operating officer and is now acting CEO, is being considered along with external candidates for the chief executive post, the company said.

Donald Layton, named E*Trade chairman on Nov. 29, is leading the CEO search. "E*Trade's board and management team are acting swiftly to establish and execute a turnaround plan designed to unlock the company's value," he said. (Editing by Gary Hill, Leslie Gevirtz)