Beleaguered discount brokerage E*Trade is getting a $2.5 billion cash infusion from hedge-fund manager Citadel Investment Group. At the same time E*Trade CEO Mitchell Caplan has quit the broker and will be replaced in the short term by company COO R Jarrett Lilien.
The Citadel transaction includes $2.4 billion in "immediate funding", with the remaining $150 million expected by 15 January 15 2008.
E*Trade says the investment "fortifies" its balance sheet and provides additional capital to manage credit risk.
The agreement also removes the assets with the greatest market risk from the broker's consolidated balance sheet, says E*Trade. Affiliates of Citadel have bought E*Trade's $3 billion asset backed securities (ASB) portfolio, including
its ABS collateralised debt obligations (CDOs) and second lien securities.
Furthermore, effective immediately R Jarrett Lilien has been named acting CEO of the troubled company, succeeding Mitchell Caplan who has stepped down.
Lilien, who is also a director of the company, has been E*Trade Financial's president and chief operating officer, leading the retail business since 2003. New York-based E*Trade says it will conduct an executive search for the CEO position, which will include Lilien and external candidates.
In addition, Donald Layton, who has served as a special advisor to the board of directors, will become chairman, succeeding George Hayter who will remain a director of the company. Layton retired in 2004 after 29 years at JP Morgan Chase and its predecessors, serving most recently as vice chairman and as a member of its three person office of the chairman and executive committee.
Commenting on the Citadel investment, new CEO Lilien says the transaction is "a major vote of confidence" and allows us to "directly address customer concerns and get back to our real business".
Ken Griffin, founder and CEO of Citadel Investment Group, says: "We believe this capital infusion will restore investor and customer confidence in the company, and will allow the Board and management to continue to grow the business from a position of strength, creating value for all shareholders."
Earlier this month a Citi analyst downgraded E*Trade to 'sell' and warned of a potential bankruptcy risk after the online broker reported news of further mortgage-related losses, the withdrawal of earnings guidance and an SEC investigation into its capital markets business.