THE TOURNAMENT ORGANIZER HATH SPOKEN. Obviously that's settled for the tournament.
But for the sake of academic discussion, I still don't think the FAQ adequately addresses this particular situation. Intel doesn't affect the ship's ability, but that says nothing about nearby squadrons. My main problem is if you apply "When a squadron attacks, it must attack an engaged squadron if possible rather than an enemy ship." after Heavy, then Heavy is negated in every situation. The wording for Heavy is perfectly clear. Instigator's unique ability just causes a unique problem. Normally, either you're engaged with a squadron with or without Heavy. Now we're got a situation where a ship is causing the engagement, but a Heavy squadron is the only squadron available to shoot, even though by the rule it can not stop you from shooting a ship. Great discussion, though. I'll probably package all this up and send a super email to FFG again.
Edited by Truthiness