Circle Suspended Tether-Linked Fund Over Suspected Market Manipulation, Court Filings Show

Circle cut off arbitrage fund Heka Funds from minting and redeeming USDC in December 2023 after growing suspicious the Malta-based firm was helping Tether manipulate the stablecoin market, according to arbitration records made public this week in a Boston federal court.

Fund’s Hidden Ties to Tether Come to Light

Documents show Tether had poured $800 million into Heka’s Elysium arbitrage fund, close to 75% of its total assets, while also waiving USDT minting fees for the firm. When Heka opened its Circle account back in January 2022, founder Fabio Frontini named only one investor, leaving out Tether entirely. Arbitrator Robert Dondero, a retired judge, found this omission was intentional. Circle’s chief business officer testified the account would never have been approved had Tether’s role been known from the start.

A Trade That Wouldn’t Stop

The dispute began after the 2023 Silicon Valley Bank collapse briefly knocked USDC off its dollar peg. Heka kept buying discounted USDC and redeeming it at full value long after other funds had backed off the trade. Internal Circle staff disagreed on whether this was legitimate arbitrage or a manufactured one benefiting Tether, a disagreement serious enough that the case went to a full hearing instead of being dismissed early.

Suspension Followed Months of Restrictions

Circle first slashed Heka’s transaction limits to zero, then fully suspended the account in December 2023. A later $100 million redemption request was denied, and the fund’s service agreement expired shortly after. Heka filed for arbitration the following spring.

Ruling Favors Circle, But Fees Denied

Dondero ultimately ruled Circle acted within its contractual rights, since its user agreement let the company adjust limits or suspend accounts without needing to prove wrongdoing, only reasonable suspicion. However, he rejected most of Circle’s $5.15 million fee request, awarding just over $166,000 tied to Heka continuing to pursue a claim it apparently knew had no chance. Heka has denied any manipulation and says Circle is using the case to shift attention from its own redemption practices.