Citadel Pushes For E*Trade To Sell Itself

By DEALBOOK

Published: July 21, 2011

A few years ago, Citadel, the giant hedge fund manager, saved the online brokerage company E*Trade with a $2.5 billion cash infusion.

Now Citadel is denouncing E*Trade and calling for a sale.

Citadel said in a letter on Wednesday that the E*Trade directors had ''squandered'' a ''phenomenal franchise.'' The hedge fund, which owns 9.8 percent of E*Trade's stock, said there were a number of problems, including a poor capital position, a disappointing stock price and a weak board.

''Since November of 2007, the board has continually failed to act in the best interest of E*Trade shareholders,'' Citadel said in the letter, addressed to Steven J. Freiberg, E*Trade's chief executive. ''Having endured nearly four years of value destruction and lost opportunity, we believe it is time for change.''

In the earnings statement, Mr. Freiberg noted ''continued solid progress across the firm.'' E*Trade declined to comment on Citadel's letter.

Citadel, run by Kenneth Griffin, is pressuring E*Trade to pursue a possible sale in the hope of increasing shareholder value. Shares of the online brokerage firm dropped to less than $13 this month from $50 in late 2007.

''We believe a sale of the company could be achieved promptly and generate significantly higher shareholder value, avoiding the risks of operating as an independent company lacking leadership and financial capabilities,'' Citadel wrote.

After the letter was disclosed on Wednesday, the stock rose almost 14 percent, to close at $14.72.

Citadel is also looking to shake up the board. It wrote that it wanted to fill some board seats with independent directors ''who are not tainted by the company's past and ongoing management failures.''

The hedge fund is pushing to end the staggered board structure, which prevents activist shareholders from nominating a full slate of directors in a single year. As Citadel wrote, that system ''encourages entrenchment and shields poorly performing directors from accountability.''

This is a more complete version of the story than the one that appeared in print.