You are correct, in 'lipo charge' the charger is not balancing. Only in 'lipo balance', 'lipo fast ' or 'lipo storage' modes is the charger balance charging.

I don't know the charger, but some of these have a connection order, In other words, tthey charger expects the main power leads to be connected to teh charger 1st, the the balance cpnnector to be connected - this is how my Hyperion 0610iNet expects a lipo charge to be set up.

Look at your manual and see if there is anything specific about the order in which these are connected.

Let ne see if I understnad what you're saying - this is a 2S 500mah lipo that can charge at 3C??

Charger compares the voltage from the main power leads to what it sees on the balance conn, if these don't correspond, you get an error. Do you have a way to measure the voltage (DVM/MM)? If this lipo doesn't have at least 6v (2S), its going to cause an error cause teh lipo has been overdischarged.