Circle secures win over Tether-backed Heka Funds in USDC manipulation lawsuit

An arbitrator has rejected a $49 million damages claim brought by Heka Funds, a Malta-based trading firm financially tied to Tether, over Circle’s decision to ban it from redeeming USDC.

The filings became public in a Boston federal court on Tuesday, after Circle moved to confirm the private arbitration award.

What did Circle accuse Heka of doing?

Circle suspended Heka in December 2023, after suspecting that the fund was trading in a way that helped Tether’s USDT grow at USDC’s expense, according to a petition Circle filed in Massachusetts federal court.

However, the dispute can be traced further back to March 2023, when Silicon Valley Bank collapsed. That incident took down part of the cash reserve behind USDC, and the token briefly slipped under its $1 peg.

Arbitrage funds responded the way the redemption system is designed to, which was to buy the discounted coin, redeem it with the issuer for a full dollar, and help nudge the peg back toward $1.

Heka did the same, but Circle told the arbitrator the fund’s redemptions dwarfed those of other participants and that Heka kept redeeming after rival traders had stopped seeing any profit in it.

Circle came to believe the dollars were flowing to Tether. Heka, associated with London’s Abraxas Capital Management, ran USDC redemption and arbitrage strategies that had returned more than 100% since the fund launched.

The $800 million Tether investment that Circle discovered

The relationship soured when Circle discovered the scale of Tether’s stake in Heka. Tether had put around $800 million into the fund through a linked vehicle, about three-quarters of Heka’s assets, and had waived the fees it normally charged for minting new tokens, according to court filings.

The arbitrator, retired judge Robert Dondero, found that Heka hid that connection and understood disclosing it would set off, in the filing’s phrasing, “bells and whistles of concern” at Circle.

On the central charge, Dondero stated that Circle “became appropriately concerned that Heka arbitrage was structured and possibly encouraged by Tether so that US dollars could be moved to Tether from Circle in exchange for USDC.” That falls short of a formal finding that Heka manipulated the market.

Dondero upheld the ban, ruled that Heka had acted in bad faith by concealing Tether’s backing, threw out every claim, and ordered the fund to pay Circle about $166,000 in legal and expert costs.

Heka pushes back

Heka rejects the manipulation label. A spokesperson said the fund “never engaged in market manipulation and has never been the subject of any regulatory investigation or proceeding involving market manipulation or similar misconduct.”

The fund also stated that Circle’s push to make the confidential arbitration material public was an attempt to distract others from the real issue, which was its refusal to honor its promise to redeem USDC for cash.

Tether has not been named as a party to the dispute. However, the court documents revealed how far the two largest stablecoin issuers will go to police their own platforms.

Circle has built its brand as the compliance-first stablecoin issuer, and it is defending USDC’s roughly 24% market share against Tether and newer entrants. DeFiLlama put the total stablecoin market at about $310 billion, with USDT at roughly $184 billion and USDC near $73 billion.

Circle’s next step is a hearing before Judge Myong J. Joun on its request to turn the arbitration award into an enforceable federal judgment. No date had been set as of publication.

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