Citadel: E*Trade Would Be Better Off Without Mortgage Losses, Board, Independent Existence

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After a good first half, Citadel is getting so close to its high-water mark that Ken Griffin is starting to reminisce about the good old days when he used to earn performance fees. That in turn reminds him of what else he was up to back in those care-free pre-crash times, like sinking $2.5 billion into an online brokerage saddled with a disastrous mortgage lending operation in November 2007.

And so today he decided to catch up with E*Trade Financial, where he's the largest shareholder after leading a rescue in 2007. But what started as a nice note to the CEO quickly turned ugly.

E*TRADE is one of the most recognized and popular online brokerage firms in the industry. It consistently receives high marks for its trading platform, customer service and usability, and has benefited from strong customer loyalty. Yet, despite a powerful brand and excellent products, under the stewardship of E*TRADE’s Board the Company has lost money every year since 2006. The stock has declined a stunning 94% over the last five years, destroying more than $9 billion in stockholder value.

Specific complaints include that E*Trade failed to raise capital while markets were open, leading to a regulator-mandated highly dilutive equity raise in June 2009. Citadel also doesn't like the staggered board, of which half the directors "share the remarkable distinction of having presided over the Company’s catastrophic mortgage loan investment strategy."

The bottom line:

E*TRADE’s Board must take immediate action to consider how best to maximize shareholder value. We urge the Board to retain qualified, independent and unconflicted financial advisors to explore strategic opportunities in the interest of increasing shareholder value. 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 also wants to de-stagger the board and replace outgoing directors with "qualified, independent, objective candidates who are not tainted by the Company’s past and ongoing management failures."

ETFC is up about so far today, meaning Citadel made about $110 million with their letter.

Citadel Assails E*Trade and Calls for a Sale [Dealbook]
Letter from Citadel to Steven J. Freiberg [SEC]

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