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OTS Suspends E*Trade, Citadel Order Flow Deal Application

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OTS Suspends E*Trade, Citadel Order Flow Deal Application

By Brett Philbin Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- While regulators have signed off on E*Trade Financial Corp.'s (ETFC) debt exchange, they're less keen on another unrelated deal with its largest shareholder. On Friday, the Office of Thrift Supervision suspended its review of an application from the New York-based online broker in which it seeks permission to route 97.5% of its "marketable customer orders" in all publicly traded stocks to Citadel Investment Group, an increase from 40%. In exchange, E*Trade may receive $100 million. The OTS issued a policy and law letter, which suspends consideration of the application, while it "considers certain issues," William Ruberry, a spokesman for the banking regulator, said Monday. He declined to elaborate on the issues. E*Trade and Citadel, a Chicago-based hedge fund giant, agreed to the tentative deal on June 15, two-days before E*Trade announced a much-needed capital-raising plan. The company has been hit by heavy losses within its bank's mortgage portfolio. Ruberry said the application is "still active," but declined to offer a timetable on when a decision may be reached. Representatives from E*Trade and Citadel declined to comment. JMP Securities analyst Michael Hecht said that Citadel, which owns 14.9% of E*Trade's shares, would receive a "a pretty sweet deal" from an amended order flow agreement. Hecht estimated that E*Trade's market-making business generated roughly $80 million in revenue over the last 12 months and Citadel would be capturing 75% to 80% of that business if the application was approved. For E*Trade, however, the deal doesn't affect its recent efforts with Citadel to bolster capital levels. The company plans to exchange approximately $1.7 billion of its notes for an equal principal amount of newly issued convertible debentures due 2019. E*Trade will hold a special shareholders meeting on Wednesday to receive approval for the debt exchange. "The agreements between Citadel and E*Trade for the debt exchange and the order flow are different," said Raymond James analyst Patrick O'Shaughnessy. He said the debt exchange is still scheduled to go through, pending shareholder approval, adding that measure is "what is going to make sure E*Trade has a sustainable capital position." Shares of E*Trade recently traded up 4 cents, or nearly 3%, at $1.39. The company's stock is down more than 55% over the past year. -By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

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