Online brokerage E*Trade Financial Corp, which has been pounded by credit woes in the mortgage business, said on Thursday that it was getting a $2.55 billion cash infusion from investors led by Citadel Investment Group.

E*Trade shares, which lost about 80 percent of their value amid the company's financial troubles, rose nearly 5 percent before the opening bell.

The agreement includes immediate funding of about $2.4 billion and rids the company of its $3 billion asset-backed securities portfolio, the source of its financial troubles.

Chicago-based Citadel, which has a reputation for making investments in distressed companies, will pay $800 million for E*Trade's asset-backed securities portfolio.

A second component of the deal is the purchase of $1.75 billion worth of 10-year notes, paying an annual interest rate of about 12.5 percent, E*Trade said.

Citadel Chief Executive Ken Griffin said the investment should restore confidence in E*Trade, which he credited with having a strong brand and business model, and now a refortified balance sheet.

E*Trade said it would take a fourth-quarter charge of $2.2 billion as a result of the ABS sale. It will also increase its allowance for bad loans to $400 million and is issuing common stock equal to about 20 percent of its outstanding shares.

Citadel, which is leading an investor group that also includes BlackRock Inc (BLK.N: Quote, Profile, Research), will own about 18 percent of E*Trade and have a seat on the board after the transaction.

CHANGES AT THE TOP

New York-based E*Trade also named Chief Operating Officer Jarrett Lilien as acting chief executive. He replaces Mitchell Caplan, who has stepped down.

Donald Layton, a former vice chairman of J.P. Morgan Chase & Co, will become chairman at E*Trade, where he has been a strategic adviser.

Caplan will retain a seat on the board and have an advisory role, E*Trade said.

The company said it was launching a search for a new CEO, and Lilien, who has been with E*Trade since 1999, will be considered along with external candidates.

E*Trade is best known for its brokerage business, but in recent years diversified into mortgages, mortgage securities and other lending areas. The change paid off until earlier this year, when the company was hit by large losses in its mortgage business.

Lilien said in an interview that the deal with Citadel allowed E*Trade to get its troubled asset-backed securities off its books and provided a much needed cash infusion. And he said the company planned to stick with its two-pronged business model of offering brokerage accounts and making loans.

After E*Trade took large losses in its mortgage segment, analysts said the company would have to pursue strategic alternatives, such as the sale of some assets or a takeover by a rival like Charles Schwab or TD Ameritrade.

Lilien said the board had considered about 40 different transactions, including with brokerage rivals, but he declined to name specific companies. He added that the transaction with Citadel was deemed the most beneficial.

Our belief is that our business is in great shape, he said. Our strategy we feel was on target -- it was our balance sheet that had the issues.

Earlier this month, E*Trade withdrew its financial outlook for 2007. Lilien said the company did not plan to issue financial forecasts at least through the end of the year.

E*Trade shares were up 4.7 percent at $5.53 from Wednesday's Nasdaq close of $5.28.

(Additional reporting by Justin Grant; Editing by Lisa Von Ahn)

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