E TRADE Financial Corp (ETFC)

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E*Trade's Largest Investor Trims Stake

By Laurie Kulikowski 09/25/09 - 03:18 PM EDT

NEW YORK (TheStreet) -- E*Trade Financial's (ETFC Quote) largest debt and equity holder, Citadel Investment Group, completed a debt-for-equity conversion this week, along with a sale of common stock that at least one observer says is to be expected.
Citadel sold roughly 85 million shares over the past three days and converted an equivalent amount of debt on Wednesday and Thursday, according to a Schedule 13D filed with the Securities and Exchange Commission on Friday.

The large hedge fund manager sold the shares at prices ranging from $1.70 to $2.08, according to the filing. Citadel made gross proceeds from the stock sale of $162.5 million, according to Sandler O'Neill & Partners analyst Rich Repetto.

Citadel said in the filing that it entered into the sale transaction "for the purpose of managing its aggregate exposure" to E*Trade. A spokeswoman referred TheStreet to language used in the filing.

At the same time, Citadel also tendered $87.9 million worth of Class A debentures, converting them into 84.9 million shares of common stock at an exercise price of $1.03 per share.

Following the conversions and sales, Citadel held approximately $941.7 million worth of E*Trade's Class A Debentures and approximately166.2 million shares of common stock, the filing said.

Citadel's latest shuffling of the deck of its holdings in E*Trade comes as the online broker wrapped up its own "at the market" offering earlier this week, selling a total of 80.2 million shares to raise $150 million. (Sandler O'Neill acted as the agent for the deal.)

E*Trade originally announced a recapitalization program in June, after regulators urged the company to boost capital levels at its floundering bank subsidiary. As part of the plan, debt holders -- including Citadel -- would exchange $1.7 billion worth of debt for equity. A company spokesperson confirmed this latest Citadel transaction falls under that plan.

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