Hedge fund Citadel holds a 9.8% stake in E*Trade after pumping $2.5 billion into the struggling outfit in 2007, saving it from "near certain failure" according to a letter sent this week.

The letter lambastes E*Trade's board, saying that under its stewardship the firm has lost money every year since 2006 while the stock has declined 94%, destroying more than $9 billion in stockholder value.

Says the letter: "The facts speak for themselves - stunning losses for the company, catastrophic losses for the shareholders. This is the story of E*Trade's poor management decisions."

Citadel called for a special shareholder meeting to look at hiring an investment bank to review "strategic alternatives", including a sale, as well as the declassification of its board so that all members are elected annually and the ousting of directors Michael Parks and Donna Weaver.

E*Trade has responded to the letter - which sent its shares soaring, up over 20% - by claiming its has "addressed the substance of Citadel's proposals and that it is not in the best interests of shareholders to call a special meeting at this time".

It says that it hired Morgan Stanley to conduct a review of its options late last year and concluded a sale "would not maximise shareholder value". However, a special committee of the board set up in response to Citadel's letter, comprised entirely of independent directors, has decided to bring Morgan Stanley back in for another review.

E*Trade also says it decided to change its board structure in April but that the call to remove Parks and Weaver is "inappropriate, and contrary to Delaware law".

According to the Wall Street Journal, citing sources, TD Ameritrade directors plan to discuss a bid for its rival at a meeting on Tuesday. Another potential suitor is Charles Schwab, although its CEO has stressed that there are several hurdles to a takeover.

Steven Freiberg, CEO and interim chairman, E*Trade, says: "Maximising value for shareholders has been, and will always be, the primary focus of E*Trade's board and management. We believe this priority has been clearly demonstrated by our tangible actions over the past few years, as we significantly bolstered our capital position and moved the company back toward consistent earnings, even in a challenging macro-economic environment. That said, we value the opinions of our shareholders and have undertaken a number of actions to respond constructively to Citadel's letter without disrupting our operations or impairing the investment of our shareholders."