Legally, E*Trade (NASDAQ: ETFC)'s press release announcing its deal with Citadel might have been fine.

But according to Fortune's Colin Barr, the 8-K detailing the transaction makes it sound a lot less appealing. Barr writes, "One reason the Citadel deal initially appeared so bullish for E*Trade was that Citadel was taking big, apparently unhedged, debt and equity stakes in the struggling online financial company -- seemingly betting that it could oversee a recovery in the company's fortunes."

But the reality is that much of the debt Citadel bought could become more senior than the other senior debt in the event of a bankruptcy.

This looks a little bit like the infusion that Countrywide Financial (NYSE: CFC) got from Bank of America (NYSE: BAC). The $2 billion investment gave Countrywide notes paying a 7.25% interest rate to Bank of America and providing the bank an option to purchase Countrywide shares at $18 -- 41% below their their market price back then (of course, the infusion has, long-term, done little to stop the bleeding: Countrywide now trades at just $10.42 per share.

The point is that hedge funds and banks, usually (Merrill Lynch (NYSE: MER) says hi) don't dole out money with pathological stupidity. Citadel invested as a vulture, and got a great deal by preying on E*Trade's desperation and fear of bankruptcy.

There's nothing wrong with that, but it's hardly bullish for E*Trade.