When Heka Funds opened an account with Circle in January 2022, the Malta-based arbitrage fund listed only one investor name. What it failed to disclose was a massive backer later found to have poured around $800 million into it - Tether. That fact only came to light after Boston federal court documents were made public this week following Circle’s arbitration victory against Heka.
The arbitrator, retired judge Robert L. Dondero, ruled in favor of Circle on the remaining contract claims. He stated that Circle acted within its contractual rights when it halted Heka’s USDC minting and redemption services over suspected market manipulation.
Secret Investor Behind the Malta Fund
Heka Funds is managed by London-based Abraxas Capital Management and opened a Circle account for its Elysium Global Arbitrage Fund. During the onboarding process, Heka only disclosed a single investor named Simon Grima.
Yet, according to testimony from Heka founder Fabio Frontini, Tether’s investment in the fund reached roughly $800 million - about 75% of Elysium’s total assets. Dondero concluded this concealment was deliberate to hide Tether’s involvement. Circle’s Chief Business Officer, Kash Razzaghi, testified that Circle would never have approved the account had it known of Tether’s role from the start.
From SVB Discount to Rejected Redemptions
The root of the dispute traces back to the collapse of Silicon Valley Bank in March 2023, which briefly caused USDC to depeg from the dollar. Heka purchased discounted USDC on secondary markets and redeemed it at full value with Circle - even after other arbitrage firms stopped doing so as spreads narrowed.
Internal Circle communications revealed differing opinions. Razzaghi described the activity as artificial rather than market-driven arbitrage, noting that Tether reportedly waived its normal fees. Meanwhile, Circle employee David Norton initially deemed the trading commercially reasonable before changing his mind after monitoring market spreads. Circle even permitted Heka to redeem more than $587 million in USDC over two weeks while testing whether the trading opportunity depended on Heka’s own activity. Coinbase also stated it was uncomfortable working with Heka due to its ties to Tether, leading it to restrict the account.
Circle ultimately slashed Heka’s minting and redemption limits to zero in November 2023, then suspended the account on December 1 under a contract clause after Frontini threatened legal and regulatory action. A $100 million redemption request from Heka in February 2024 was rejected; the service agreement ended the following month. In the same month, Tether reportedly injected an additional $500 million into Elysium before Heka filed its arbitration claim. It was also revealed that Frontini attempted to open a new account at Circle France without disclosing the ongoing dispute.
On the legal front, Dondero cited Delaware law and found that Circle did not breach the agreement, as the terms of service permitted Circle to adjust transaction limits and suspend services at its discretion. Circle was not even required to prove that market manipulation actually occurred - it only needed a reasonable conclusion that it may have taken place. A Heka spokesperson pushed back via the Financial Times, maintaining that the fund never manipulated markets or faced regulatory investigation, while accusing Circle of deliberately unsealing arbitration records to divert attention from the rejected redemptions. Either way, this legal victory comes as Circle aggressively expands its institutional business - having recently secured final US OCC approval to establish Circle National Trust and preparing to host its Current Seoul event on July 23. For stablecoin users, the case peels back the curtain on the complex and hidden web of capital moving behind the seemingly straightforward tokens in their wallets.
Via crypto.news.
Disclaimer: This article is for informational and educational purposes only, not financial advice. Cryptocurrency assets are highly volatile and carry significant risk. Always do your own research (DYOR) and never invest more than you can afford to lose.
