Circle won a court-backed arbitration in Boston federal court after records were released detailing why the stablecoin issuer suspended Heka Funds’ USDC issuance and redemption services due to suspected market manipulation involving Tether.
summation
- Circle won its arbitration case after an arbitrator ruled that Heka Funds had lawfully suspended its USDC issuance and redemption services.
- Court records show Heka did not disclose Tether’s role as a major investor in the fund, and Circle reasonably suspected possible market manipulation.
- The ruling comes as Circle continues to expand its institutional business through new financing plans and partnerships in the U.S. and South Korea.
According to court documents filed by Circle on Tuesday as part of a petition to confirm the February arbitration award, the company concluded that the Malta-based arbitrage fund failed to disclose Tether’s role as a major investor and trading activity that it reasonably suspected could be manipulating USDC markets.
Retired Judge Robert L. Dondero, who served as arbitrator, ruled in favor of Circle on the remaining contract claims, ruling that the company acted within its rights granted under its contract with Heka.
Hidden tether relationship becomes central to dispute
At the center of the case was Heka Funds, managed by London-based Abraxas Capital Management. Heka Funds opened a Circle account for the Elysium Global Arbitrage Fund in January 2022.
According to arbitration records, Heka only disclosed investor Simon Grima during the onboarding process, and Tether became the fund’s dominant capital provider. According to testimony from Heka founder Fabio Frontini, Tether’s investments amounted to approximately $800 million by the time of arbitration, representing approximately 75% of Elysium’s assets.
Dondero concluded that the omission was intentional and wrote that the omitted disclosure appears to have been designed to hide Tether’s involvement in the fund. Kash Razzaghi, Circle’s chief business officer, testified that the company would not have approved the account if it had known of Tether’s role at the start of the relationship.
The trading dispute came as USDC temporarily fell below the dollar peg following the collapse of Silicon Valley Bank in March 2023. According to the filing, Heka purchased USDC at a discount on the secondary market and redeemed the tokens at par through Circle after spreads narrowed and many other arbitrage firms were halted.
Inner circle communications presented during the arbitration indicated that management disagreed as to whether the transaction was legitimate arbitrage. Razzaghi described this activity as “manufactured arbitrage, not market-driven,” explaining that Tether waived its normal fees. Meanwhile, Circle employee David Norton argued that the deal initially seemed commercially reasonable.
Circle allowed Heka to redeem more than $587 million in USDC over a two-week period while it tested whether the trading opportunity depended on Heka’s activity. Norton later asked Heka to pause trading and changed his stance after observing market spreads narrowing instead of widening, according to court records. According to the filing, Coinbase also informed Circle that it was uncomfortable working with Heka due to the fund’s Tether relationship and fee structure, which led the exchange to place restrictions on the account.
The arbitrator will uphold Circle’s contractual rights.
According to court documents, Circle reduced Heka’s issuance and redemption limits to zero in November 2023 before suspending the account on December 1 under Section 9(c) of the parties’ Master Services Agreement after Frontini threatened legal and regulatory action.
Heka’s request to repay $100 million in February 2024 was rejected, and the master services agreement expired the following month. According to testimony presented during the arbitration, Tether invested an additional $500 million in Elysium in the same month before Heka filed the arbitration claim.
Another issue raised during the proceedings concerned Frontini’s application for an account with Circle France shortly before the hearing. According to the arbitration award, he failed to disclose the ongoing dispute, submitted a board resolution that Heka maintained an active Circle relationship, and later testified that he expected the U.S. application to fail.
Applying Delaware law, Dondero found that Circle had not breached either agreement because its user terms allowed the company to adjust transaction limits and discontinue service at its discretion. The arbitrator also ruled that Circle did not have to prove that market manipulation occurred, only that it reached a reasonable conclusion that such activity could occur.
Circle requested approximately $5.15 million in legal fees and costs, but Dondero only paid $166,643.25 in relation to the expert’s work after confirming that Heka continued to pursue a $49 million lost profits claim that had already been removed from the case.
A Heka spokesperson said: Financial Times The Fund has never engaged in market manipulation and has never been the subject of any regulatory investigation related to such conduct. The spokesperson also said Circle had sought to make the arbitration records public to divert attention from its refusal to process USDC redemptions.
This disclosure comes as Circle continues to expand its institutional business globally. The company recently received final approval from the Office of the Comptroller of the Currency to establish the Circle National Trust and is preparing to host an invitation-only Current SEOUL event on July 23. At the event, executives from banks, cryptocurrency exchanges and payments companies are expected to discuss future partnerships as Circle pursues wider USDC adoption in Korea.