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Former directors allege fraud at Tether-backed cryptocurrency group Northern Data
Two former executives at Northern Data, a German-listed cryptocurrency and AI infrastructure company backed by Tether, said they were fired after raising concerns about alleged fraud they said was being perpetrated by its chief executive and chief operating officer.
In a complaint Filed last month in the Central District Court of California, Joshua Porter and Gulsen Kama allege that Northern Data was “falsely misrepresenting the strength of its financial condition to investors, regulators and business partners” and “was knowingly committing tax evasion amounting to potentially tens of millions of dollars.”
So far, 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 reporting on Monday that the company is investigating a US IPO for its AI cloud computing and data center businesses:
Banks invited to compete for a seat have suggested valuations of around $10 billion to $16 billion. That compares with [Northern Data’s] market capitalization of €1.3 billion ($1.4 billion) at Monday’s close.
Potential advisers are basing the valuation range in part on Northern Data’s partnership with Tether Group, people familiar with the matter said. Tether’s backing facilitated the company’s purchase of more than $800 million worth of cutting-edge chips from Nvidia Corp used for generative AI applications.
Northern Bitcoin launched in 2018 as a pure-play cryptocurrency miner, later changing its name to Northern Data as grew by acquisition in high-performance computing data centers. It plans to open cloud computing facilities in the US and UK to add to its eight cryptomining sites, six of which are in North America.
Stablecoin issuer Tether holds 51 percent of Northern Data shares after agreeing last year to a “strategic investment“which involved exchange Nvidia GPUs for capital and a shareholder loan. The former directors’ allegations 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 his superiors that the company’s German parent company was “nearly insolvent,” a court complaint dated June 21, 2024, alleges:
After receiving the promotion, Plaintiff Porter began to have a limited understanding of Northern Data’s finances for the first time. Plaintiff Porter was shocked to learn that the company had a $30 million German tax liability and additional liabilities of nearly $8 million, while at the same time 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 the executive leadership team, Porter also attempted to expose what the complaint calls Northern Data’s “rampant tax avoidance.”
Accounting firm Deloitte refused to provide an option letter supporting Northern Data’s decision not to pay the IRS any taxes on cryptocurrency mining profits generated on U.S. soil, the plaintiffs allege. But instead of changing its operating structure or tax treatment to avoid the risk of violating 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 be in the tens of millions of dollars.”“and that “an IRS audit could potentially cause Northern Data to become insolvent.”
It was at this time that Aroosh ThillainathanNorthern Data co-founder and CEO stopped responding to Potter’s communications, they claim:
Plaintiff Porter’s concerns fell on deaf ears, so he declared his intention to go directly to Northern Data’s Board of Directors to alert them to the companies’ rampant illegal activity. Shortly thereafter, in obvious 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 was actively exposing and then attempting to prevent Defendants from falsely misrepresenting their financial position to potential auditors, tax advisors, and investors. At various times, Plaintiff Kama reported her concerns about the accounting and securities fraud she was encountering to Northern Data’s global CEO, COO, the Chairman of the Supervisory Board, and the company’s Chief Legal and Compliance Officer, to no avail because the CEO and COO were perpetuating the accounting and securities fraud.
The CEO and COO intended to mislead existing and potential investors at a meeting scheduled for June 12, 2023. As a result of Plaintiff Kama repeatedly informing and warning the executives responsible for the illegal 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 held meetings with KPMG, Northern Data’s auditor for its 2020 and 2021 financials. In February 2023, at a meeting about signing off on its 2022 figures, KPMG “raised concerns about the company’s liquidity position as a going concern” and asked for documentation, the complaint says.
In early May, with KPMG still not hired as auditor, Thillainathan reportedly told Kama to look for another firm:
While he said to look at the top 20-25 auditors; he expressed that he did not care if they were ranked so highly because no one cares who the auditors are. He claimed that KPMG was being difficult and unreasonable, but the underlying command was that he wanted a firm that would perform the audit without questions. Plaintiff Kama tried to back out, but Thillainathan ordered her to do as instructed and told her straight out that her head was on the chopping block.
A month later, KPMG had still not signed the letter of engagement and relations were said to have deteriorated between Kama, Thillainathan and the group’s chief operating officer, Rosanne Kincaid-Smith.
Kama allegedly issued a special “hold” notice to the accounting and finance department requesting that historical records be preserved and asking staff to include her in all communications with the oversight board. 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 corresponds to a pattern of fundraising “followed by the issuance of exaggerated press releases to boost the share price,” the plaintiffs allege.
Berenberg data shows Northern Data has raised money 13 times since December 2020. [Hi-res]
Zettahash is a wholly owned subsidiary of Tether © Berenberg
KPMG finally delivered its audit report on Northern Data’s 2022 financials in March 2024, flagging “material uncertainty about the group’s ability to continue as a going concern” due to its reliance on bitcoin sales and Tether shareholder lending.
The company last week postponed the publication of its 2023 audited financial statements until July 12th. Previously, I had said that the report would be released by fourth quarter of 2023and then by the end of the first semester of 2024.
Its new auditor is Liebhart & Kollegen, according to a May 2024 Regulatory Filing. Liebhart describes itself in its LinkedIn profile as a Stuttgart law firm with a single office and “almost 15 staff members.” It has been contacted for comment.
KPMG and Tether did not respond to our requests for comment on the lawsuit.
Northern Data successfully petitioned the court in May to have parts of the complaint redacted, saying they constitute “confidential and privileged communications protected by the attorney-client privilege and the attorney work product doctrine.” The plaintiffs said this week in a filing that they were reserving the right to contest the sealing order.
Here are the links to the legal complaint It is the sealing request.