Two former executives of Northern Data, the German crypto and AI infrastructure company backed by Tether, say they were fired after raising concerns about alleged fraud they say was perpetrated by its CEO and COO.
In a complaint filed last month in California’s Central District Court, Joshua Porter and Gulsen Kama allege that Northern Data “falsely misrepresented the strength of its financial position to investors, regulators and business partners” and “knowingly engaged in tax evasion of potentially tens of millions of dollars.” “
At the time of Pixels, Northern Data had not responded to Alphaville’s questions about the lawsuit.
Northern Data made headlines this week for other reasons, with Bloomberg News reporting on Monday that the company is exploring a US IPO for its cloud computing AI and data center business:
Banks asked to bid for the role proposed valuations of around $10 billion to $16 billion. This compares with [Northern Data’s] market capitalization of €1.3 billion ($1.4 billion) as of Monday’s close.
Potential advisers are basing the valuation range in part on Northern Data’s connection to Tether Group, people familiar with the matter said. Tether’s backing enabled the purchase of more than $800 million of Nvidia Corp’s high-end chips used for generative AI applications.
Northern Bitcoin floated in 2018 as a pure cryptocurrency miner, then changed its name to Northern Data as it grew through acquisitions into high-performance computing data centers. It plans to open cloud computing facilities in the US and UK to add to its eight crypto mining locations, six of which are in North America.
Stablecoin issuer Tether owns 51 percent of Northern Data after agreeing to a “strategic investment” last year that included swapping Nvidia GPUs for stock and a shareholder loan. Accusations of former directors preceded his involvement.
Joshua Porter was appointed COO of Northern Data’s US subsidiary in April 2022, before being promoted to President and CEO of North America in January 2023. He was fired in March 2023 after alerting his superiors that the company’s German parent company was “borderline insolvent”, a court complaint dated June 21, 2024 states:
After receiving a promotion, Plaintiff Porter first began to acquire a limited knowledge of Northern Data’s finances. Plaintiff Porter was shocked to learn that the company had a German tax liability of $30 million and other liabilities of nearly $8 million, while having only $17 million in cash and $3 to $4 million in monthly payroll.
In addition to raising “the company’s financial condition, cash position and solvency (or potential lack thereof)” to the executive management team, Porter also sought to address what the complaint calls “Northern Data’s rampant tax evasion.”
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 running afoul of U.S. law, Northern Data “took steps to illegally avoid U.S. taxes” for at least 2021, the complaint says. He adds that, in Potter’s view, the US tax liability “could easily be in the tens of millions of dollars“and that “an IRS audit could potentially bankrupt Northern Data.”
It was around this time that Aroosh Thillainathan, co-founder and CEO of Northern Data, stopped responding to Potter’s communications, he claims:
Plaintiff Porter’s concerns fell on deaf ears, so he stated his intention to go directly to Northern Data’s board of directors to alert them to the companies’ rampant illegal activity. Shortly thereafter, in apparent retaliation for his whistleblowing activities, Plaintiff Porter was wrongfully terminated.
Gulsen Kama was appointed CFO for North America at Northern Data in July 2022 and was promoted to deputy group CFO about two months later.
The complaint continues:
After her promotion, Plaintiff Kama actively exposed and then attempted to prevent Defendants from misrepresenting her financial situation to potential auditors, tax advisors, and investors. At various times, Plaintiff Kama communicated her concerns regarding the accounting and securities fraud she discovered to Northern Data’s Global CEO, COO, Chairman of the Supervisory Board, and the Company’s Chief Legal and Compliance Officer, as the CEO and COO perpetuated the accounting fraud and securities fraud.
The CEO and COO intended to deceive existing and potential investors at the upcoming meeting scheduled for June 12, 2023. As a result of Plaintiff Kama repeatedly informing and warning officials who were 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 prosecutors, Kama arranged meetings with KPMG, Northern Data’s auditor, for its 2020 and 2021 financials. In February 2023, at a meeting to sign off on its 2022 numbers, KPMG “expressed concerns about the company’s liquidity and requested documentation,” it says in the complaint.
In early May, when KPMG was still not engaged as an auditor, Thillainathan reportedly told Kama to look at another firm:
While he said to look at the top 20-25 auditors; he expressed that he didn’t care if they were that high because no one cared who the auditors were. He claimed that KPMG was difficult and unreasonable, but the basic order was that he wanted a company that would audit with no questions asked. Plaintiff Kama tried to push back, but Thillainathan ordered her to do as directed and bluntly told her that her head was on a log.
A month later, KPMG still had not signed the contract letter and relations between Kama, Thillainathan and group chief operating officer Rosanne Kincaid-Smith are said to have soured.
Kama reportedly issued a special “hold” notice to the accounting and finance department, demanding the preservation of historical records and requesting that employees include her in all communications with the supervisory board. According to the complaint, the employment relationship with Kama was terminated the following day.
Shareholders voted to approve the capital increase at the group’s general meeting the following Monday, June 12, 2023. This fits a pattern of fundraising “followed by issuing inflated press releases to boost the share price,” the plaintiffs claim.
Berenberg figures show that Northern Data has withdrawn cash 13 times since December 2020. [Hi-res]
KPMG finally submitted its 2022 audit report on Northern Data in March 2024, citing “material 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 postponed the release of its 2023 audited financial results to July 12. It previously said the report would be published in the fourth quarter of 2023 and then by the end of the first half of 2024.
Its new auditor is Liebhart & Kollegen, according to a May 2024 regulatory filing. Liebhart describes itself on its LinkedIn profile as a Stuttgart law firm with “almost 15 team members.” It has been contacted for comment.
KPMG and Tether did not respond to our requests for comment on the lawsuit.
Northern Data successfully asked the court in May to have portions of the complaint redacted, saying it was a “confidential and privileged communication protected by the attorney-client privilege and the attorney work product doctrine.” The plaintiffs said in a filing this week that they reserve the right to challenge the sealing order.
Here are links to the court complaint and seal request.