Shares of E-Trade Financial Corp. (ETFC) added to their losses on Wednesday after the online discount brokerage said it would sell $400 million new common stock and swap $1.35 billion of debt for preferred shares.

While the move will help the beleaguered firm plug its capital holes following a government mandate, current shareholders remained discontented as their holdings would be diluted by nearly 40% through the stock sale and once more if the preferred shares are converted in future.

In a regulatory filing, E-Trade said both its capital-raising plans are being heavily backed by hedge fund giant Citadel Investment Group LLC which will buy either $50 million or $100 million shares and exchange up to $800 million in debt. Along with shoring up capital, the move would help E-Trade to eliminate interest payments related to debt.

The transaction could make Citadel a 50% owner of the New