Circle suspends Heka fund over alleged Tether manipulation

Circle froze minting and redemption services for the Elysium Global Arbitrage Fund on Dec. 1, 2023 after arbitration filings made public in a Boston federal court indicated the fund was dominated by Tether and that some trades may have been engineered to benefit Tether. The fund is managed by Abraxas Capital Management and is registered in Malta.

Circle opened a free account for the fund in January 2022 after the fund disclosed a single investor, Simon Grima. Testimony presented in arbitration showed Tether’s position in Elysium rose from roughly $500 million at the end of April 2023 to about $800 million by the time of the arbitration, equal to roughly 75% of the fund’s assets. Arbitrator Robert L. Dondero wrote that the omission of the fund’s actual capital providers appeared deliberate and was intended to avoid revealing Tether’s role.

The trading at issue began after the March 2023 collapse of Silicon Valley Bank, when USDC briefly traded below $1. Heka purchased discounted USDC on secondary markets and redeemed it with Circle at par, a form of arbitrage that other funds also ran initially. Filings show other traders reduced activity as the spread tightened, while Heka continued large-scale redemptions. Internal messages cited in the record show disagreement at Circle: Chief Business Officer Kash Razzaghi described the activity as “a manufactured arb not a market-driven one,” while another employee, David Norton, argued the trades appeared rational and warned that cutting Heka off would hand the opportunity to other traders.

Circle permitted Heka to redeem more than $587 million in USDC across a two-week test period to observe whether the spread would change without Heka’s participation. In May 2023, after Circle asked Heka to pause redemptions, the spread tightened; Norton referred to that result as “a pretty material data point.” Coinbase raised separate concerns about Heka’s ties to Tether and its fee structure and placed restrictions on the fund’s account.

Court filings show Circle reduced Heka’s minting and redemption limits to zero in November 2023. Heka’s founder, Fabio Frontini, threatened legal action and regulatory complaints. Circle suspended the account on Dec. 1, 2023, citing provisions of the master services agreement. A request by Heka to redeem $100 million in February 2024 was denied and the master services agreement lapsed in March 2024. Frontini testified that Tether invested another $500 million in Elysium in February 2024; Heka filed for arbitration about a month later. The filings say Frontini later sought an account with Circle’s French unit without disclosing the pending arbitration and that a board resolution misstated the fund’s relationship with Circle.

Arbitrator Dondero found that under Delaware law and the contract terms Circle retained the right to change limits “as we deem necessary” and to suspend services “without notice and without liability.” He concluded Circle did not breach the agreements because it only needed a reasonable basis to suspect possible manipulation, not definitive proof. Dondero declined to award Circle $5.15 million in fees and costs but awarded $166,643.25 related to expert work after finding Heka had pursued a $49 million lost-profits claim that had been foreclosed.

Heka has maintained it did not engage in market manipulation and said it has not been the subject of any regulatory proceeding involving such misconduct. A Heka spokesperson told the tribunal that Circle’s public use of parts of the arbitration record was intended to divert attention from Circle’s refusal to honor USDC redemptions. Circle and Tether did not provide comment in the arbitration record.

Circle issues the USDC stablecoin, which has about $73 billion in circulation, and Tether issues the rival USDT stablecoin. The filings detail interactions between large stablecoin issuers, an arbitrage fund trading on peg dislocations, and an opaque capital structure that service providers cited when assessing risk.