E*Trade Shares Take Hit on Offer Pricing

E*Trade shares fell on huge volume Thursday after its largest investor priced a massive secondary offering with a 5% discount.
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NEW YORK (

TheStreet

) -- Shares of

E*Trade Financial

(ETFC) - Get Report

tumbled on huge volume Thursday after Citadel Investments, its largest investor, priced a massive secondary offering with a 5% discount.

The stock was down 6% to $1.74 in recent trades. Volume was already nearly 118 million less than two hours into the session, more than double the three-month trailing daily average of 41.7 million.

E*Trade, which isn't selling any stock in the offering, disclosed the

plans for the sale

after Wednesday's closing bell. At that time, it said two affiliates of Citadel would be selling a total of 170 million shares.

This morning, the

scope of the deal

widened somewhat, and the affiliates are now selling 172 million shares at $1.75 each. The stock closed Wednesday at $1.84. The overallotment option provides for the sale of up to an additional 25.8 million shares. Citadel would see gross proceeds of roughly $350 million if the over-allotment is fully exercised.

In an interesting aside, new CEO Steven Freiberg intends to purchase $1 million worth of common stock as part of the offering. Freiberg, a former

Citigroup

(C) - Get Report

executive, was named to the CEO post on March 22.

Citadel is E*Trade's largest equity and debt holder. The two affiliates involved in this sale -- Citadel Equity Fund and Wingate Capital -- own 7.6% and 2.3%, respectively, of E*Trade's common stock. E*Trade has approximately 1.98 billion shares outstanding, according to the prospectus.

Citadel itself owns $821.6 million worth of E*Trade convertible debt, obtained mainly when E*Trade underwent its second recapitalization plan last summer. If the overallotment option is exercised, Citadel will then exercise its convertible debentures to satisfy the overallotment, the filing said.

Under terms of the convertible debt exchange, Citadel is not allowed to own more than 10% of E*Trade common shares for 60 days following the conversion, meaning that the hedge fund will only be allowed to convert debt that equals a maximum of 9.9% of common stock.

If Citadel's debt were fully converted, it would own roughly 34% of E*Trade's common stock.

--Written by Laurie Kulikowski in New York.