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Former directors allege fraud at Tether-backed cryptocurrency group Northern Data
Two former executives at Northern Data, a German-listed crypto and AI infrastructure company backed by Tether, say they were fired after raising concerns about alleged fraud they say was perpetrated by its chief executive and chief operating officer.
In a complaint In a complaint filed last month in the U.S. District Court for the Central District of California, Joshua Porter and Gulsen Kama allege that Northern Data “misrepresented the strength of its financial position to investors, regulators and business partners” and “knowingly evaded taxes to the tune of tens of millions of dollars.”
At this time, Northern Data has not responded to Alphaville’s questions about the lawsuit.
Northern Data has been in the headlines for other reasons this week, with Bloomberg News reported Monday that the company is exploring a U.S. IPO for its cloud computing and AI data center businesses:
Banks approached for a position have suggested valuations of between $10 billion and $16 billion. [Northern Data’s] market capitalization of 1.3 billion euros ($1.4 billion) at Monday’s close.
Potential advisers are basing the valuation range in part on Northern Data’s tie-up with Tether Group, people familiar with the matter said. Tether’s backing facilitated the purchase of more than $800 million of high-end chips from Nvidia Corp used for generative AI applications.
Northern Bitcoin launched in 2018 as a pure-play cryptocurrency miner, then rebranded to Northern Data grew by acquisition It plans to open cloud computing facilities in the United States and the United Kingdom to complement its eight crypto mining sites, six of which are in North America.
Stablecoin issuer Tether owns 51% of Northern Data, after agreeing to a “strategic investment” which involved an exchange Nvidia GPUs for equity and a shareholder loan. The allegations by the former directors predate their involvement.
Joshua Porter was named chief operating officer of Northern Data’s U.S. subsidiary in April 2022 and was promoted to president and CEO of North America in January 2023. He was fired in March 2023 after raising concerns with superiors that the company’s German parent was “borderline insolvent,” according to a June 21, 2024, court filing:
After receiving this promotion, Plaintiff Porter began to have for the first time a limited understanding of Northern Data’s finances. Plaintiff Porter was shocked to learn that the company had a German tax liability of $30 million and additional liabilities of nearly $8 million, while having only $17 million in cash on hand and a monthly burn rate of $3 million to $4 million.
In addition to raising concerns about the company’s “financial condition, cash position and solvency (or potential lack thereof)” with management, Porter also sought to expose what the complaint calls Northern Data’s “rampant tax evasion.”
Accounting firm Deloitte declined to provide an election letter supporting Northern Data’s decision not to pay taxes to the IRS on cryptocurrency mining profits generated in the U.S., the plaintiffs allege. But instead of changing its business structure or tax treatment to avoid risking violations of U.S. law, Northern Data “took steps to illegally avoid U.S. taxes” for at least 2021, the complaint says. It adds that, in Potter’s view, the U.S. tax liability “could easily amount to tens of millions of dollars.”“and that “an IRS audit could potentially render Northern Data insolvent.”
It was at this time that Aroosh Thillainathanco-founder and CEO of Northern Data, stopped responding to communications from Potter, they allege:
When Plaintiff Porter’s concerns were ignored, he announced his intention to approach Northern Data’s board of directors directly to alert them of the company’s unchecked illegal activities. Shortly thereafter, in apparent retaliation for his whistleblowing activity, Plaintiff Porter was unlawfully terminated.
Gulsen Kama was appointed Northern Data’s CFO for North America in July 2022 and was promoted to deputy group CFO approximately two months later.
The complaint continues:
Following her promotion, Plaintiff Kama actively exposed Defendants’ financial position and attempted to prevent them from misrepresenting their financial position to auditors, tax advisors, and potential investors. On multiple occasions, Plaintiff Kama raised concerns about the accounting and securities fraud she was uncovering with Northern Data’s Global CEO, COO, Chairman of the Supervisory Board, and the Company’s Chief Legal and Compliance Officer, but to no avail, as the CEO and COO continued to perpetuate the accounting and securities fraud.
The CEO and COO intended to deceive existing and potential investors at an upcoming meeting scheduled for June 12, 2023. As a result of Plaintiff Kama repeatedly informing and warning the executives responsible for the unlawful acts that they were committing fraud, on or about June 8, 2023, Plaintiff Kama was retaliated against and unlawfully terminated for her whistleblowing activities.
According to the plaintiffs, Kama arranged meetings with KPMG, Northern Data’s auditor, for its 2020 and 2021 financial statements. In February 2023, at a meeting to validate its 2022 figures, KPMG “raised concerns about the company’s liquidity position as a going concern” and requested documents, the complaint states.
By early May, with KPMG still not selected as auditor, Thillainathan reportedly told Kama to look for another firm:
He said that the top 20 to 25 auditors should be looked at, but he said he did not care whether they were ranked that high because no one cares who the auditors are. He said that KPMG was being difficult and unreasonable, but the underlying order was that they wanted a firm that would do the audit without asking questions. Complainant Kama tried to resist, but Thillainathan ordered her to do as she was told and told her bluntly that her head was on the hot seat.
A month later, KPMG had still not signed the engagement letter and relations reportedly deteriorated between Kama, Thillainathan and the group’s chief operating officer, Rosanne Kincaid-Smith.
Kama allegedly sent a special “hold” notice to the accounting and finance department, requesting the preservation of historical documents and instructing staff to include him in all communications with the board of supervisors. The next day, according to the complaint, Kama’s employment was terminated.
Shareholders voted to approve a capital increase at the group’s annual general meeting on the following Monday, June 12, 2023. This fits a pattern of fundraising “followed by the publication of exaggerated press releases to drive up the share price,” the plaintiffs allege.
Berenberg data shows that Northern Data has raised funds 13 times since December 2020. [Hi-res]
Zettahash is a 100% subsidiary of Tether © Berenberg
KPMG finally released its audit report on Northern Data’s 2022 financial statements in March 2024, reporting “significant uncertainty about the group’s ability to continue as a going concern” due to its reliance on bitcoin sales and the Tether shareholder loan.
The company last week delayed the release of its audited financial statements for 2023. until July 12. He had previously said the report would be published by the fourth quarter 2023and then at the end of the first half from 2024.
Its new auditor is Liebhart & Kollegen, according to a press release. Regulatory filing of May 2024. Liebhart describes himself on his LinkedIn profile as a one-person law firm in Stuttgart with “around 15 employees”. He has been contacted for comment.
KPMG and Tether did not respond to requests for comment on the lawsuit.
Northern Data successfully filed a motion with the court in May to have portions of the complaint redacted, claiming they constitute “confidential and privileged communications protected by attorney-client privilege and the attorney work product doctrine.” The plaintiffs said this week in a folder that they reserved the right to challenge the sealing order.
Here are the links to the complaint to the court And the request to seal.