Circle Wins Arbitration Against Heka Funds
In a significant legal development, Circle has triumphed in an arbitration process that affirms its decision to halt USDC minting and redemption services for Heka Funds amid allegations of market manipulation tied to Tether. This ruling was revealed through court documents that were made available in a federal court in Boston.
Details of the Arbitration
The arbitration, overseen by retired judge Robert L. Dondero, was predicated on Circle’s assertion that Heka Funds, based in Malta and managed by Abraxas Capital Management out of London, had failed to disclose Tether as a major investor, raising serious suspicions regarding its trading practices.
Records from the arbitration detailed that Heka Funds had opened a Circle account for its Elysium Global Arbitrage Fund in January 2022, yet only identified investor Simon Grima during the onboarding process, concealing Tether’s substantial investment, which had reached approximately $800 million, or 75% of Elysium’s total assets. Judge Dondero interpreted this lack of transparency as a deliberate attempt to obscure Tether’s significant role in the fund’s operations.
Circle’s Response and Actions
Kash Razzaghi, Circle’s Chief Business Officer, testified that the account would not have been authorized if the company was aware of Tether’s involvement at the onset. Tensions escalated following the failure of Silicon Valley Bank in March 2023, which led to USDC temporarily losing its dollar peg. At that time, Heka switched tactics, purchasing discounted USDC in secondary markets and then redeeming these tokens at their full value with Circle, unlike many other arbitrage firms that had ceased operations after the price discrepancies diminished.
Internal Circle communication indicated disputes over whether Heka’s trading activity constituted legitimate arbitrage, with Razzaghi criticizing the tactics as artificially created rather than a reflection of market dynamics, attributing this to Tether’s unusual fee waivers.
Circle permitted Heka to redeem more than $587 million in USDC over a span of two weeks while it evaluated the nature of the trading opportunity. However, Circle later curtailed Heka’s limits entirely by November 2023 and officially suspended the account by December 1, following threats of legal action from Heka. A subsequent request in February 2024 from Heka for $100 million in redemptions was denied, alongside the expiration of their formal agreement a month later.
Legal Rulings and Financial Implications
The arbitration revealed that Tether had additionally invested $500 million in Elysium during the month Heka initiated its arbitration proceedings. Complications were further fueled by Frontini’s application for a separate account with Circle’s French arm, wherein he did not disclose the ongoing arbitration situation.
Judge Dondero ruled that Circle had acted within its rights as per existing agreements, stating it was not obligated to demonstrate that market manipulation occurred, only that it had reasonable grounds to suspect such activity.
Although Circle sought reimbursement for over $5 million in legal fees, the arbitrator granted approximately $166,643 solely for expert-related expenses, rejecting Heka’s ongoing claim for nearly $49 million in lost profits that had been previously dismissed.
Statements and Future Plans
A spokesperson for Heka asserted that the fund has consistently acted ethically and has never faced regulatory scrutiny for alleged market manipulation. They further suggested that Circle’s push for publicizing the arbitration details aimed to distract from its withholding of USDC redemptions.
This ruling comes as Circle is ramping up its international endeavors, having recently achieved final authorization from the U.S. Office of the Comptroller of the Currency to establish Circle National Trust. Furthermore, the firm is gearing up for its exclusive Current Seoul event scheduled for July 23, intended to foster partnerships with financial institutions, crypto exchanges, and payment service providers in a bid to broaden USDC’s footprint in South Korea.
