Key Takeaways:
Circle won a court-backed arbitration ruling after a retired judge found the stablecoin issuer lawfully suspended Heka Funds' USDC minting and redemption services over suspected market manipulation tied to Tether.
Circle secured a court-backed arbitration win after records made public July 15 in a Boston federal court detailed why the stablecoin issuer suspended Heka Funds' USDC minting and redemption services over suspected market manipulation involving Tether, its largest competitor. Retired judge Robert L. Dondero, who served as arbitrator, ruled in Circle's favor on the remaining contract claims, finding the company acted within the rights granted under its agreements with Heka.
"The omission was intended to avoid the disclosure of Tether's role in Elysium," Dondero wrote in the final award, referring to Heka's failure to disclose that Tether was the fund's dominant capital provider when the account was opened in January 2022.
At the center of the case was Heka Funds, managed by London-based Abraxas Capital Management, which opened a Circle account in January 2022 for its Elysium Global Arbitrage Fund. Heka disclosed only investor Simon Grima during onboarding, while Tether had become the fund's dominant capital provider. Testimony from Heka founder Fabio Frontini showed Tether's investment reached about $800 million by the time of arbitration, accounting for roughly 75% of Elysium's assets. Circle Chief Business Officer Kash Razzaghi testified the company would not have approved the account had it known of Tether's role when the relationship began.
The ruling strengthens Circle's legal authority to police its stablecoin ecosystem at a time when the company is expanding its institutional business globally. Circle recently received final approval from the U.S. Office of the Comptroller of the Currency to establish Circle National Trust and is preparing to host its Current Seoul event on July 23, where executives from banks, crypto exchanges, and payments companies are expected to discuss future partnerships as Circle pursues wider USDC adoption in South Korea.
The trading dispute that triggered the suspension
The dispute traces to March 2023, when Silicon Valley Bank's collapse temporarily pushed USDC below its dollar peg. Heka bought discounted USDC in secondary markets and redeemed the tokens with Circle at face value after many other arbitrage firms had stopped once the spread narrowed.
Circle allowed Heka to redeem more than $587 million in USDC over a two-week period while testing whether the trading opportunity depended on Heka's activity. Internal Circle communications presented during arbitration showed executives disagreed over whether the trades represented legitimate arbitrage. Razzaghi described the activity as "a manufactured arb not a market-driven one," attributing it to Tether waiving its normal fees, while Circle employee David Norton initially argued the trades appeared commercially rational.
Norton later changed his position after asking Heka to pause its trades and observing that the market spread tightened instead of widening. Coinbase also informed Circle it was uncomfortable working with Heka because of the fund's Tether relationship and fee structure, leading the exchange to place restrictions on the account, according to the filings.
Contractual rights and the arbitration outcome
Circle reduced Heka's minting and redemption limits to zero in November 2023 before suspending the account on Dec. 1 under Section 9(c) of the parties' master services agreement after Frontini threatened legal and regulatory action. Heka's request to redeem $100 million in February 2024 was rejected, and the master services agreement expired the following month.
Applying Delaware law, Dondero found Circle did not breach either agreement because the user terms allowed the company to adjust transaction limits and suspend services at its discretion. The arbitrator also ruled Circle was not required to prove market manipulation had occurred, only that it had reached a reasonable conclusion that such activity might be taking place.
Although Circle requested about $5.15 million in legal fees and costs, Dondero awarded only $166,643.25 related to expert work after finding Heka continued pursuing a $49 million lost-profits claim that had already been excluded from the case.
A Heka spokesperson told the Financial Times the fund had never engaged in market manipulation and had never been the subject of a regulatory investigation involving such conduct. The spokesperson also said Circle sought to make the arbitration record public to divert attention from its refusal to process USDC redemptions.
The ruling may lead to tighter scrutiny of minting and redemption practices across other stablecoins and DeFi protocols, as regulators and institutional users increasingly demand transparency around who controls access to stablecoin liquidity.
This article is for informational purposes only and does not constitute investment advice.
