News
Former Executives Allege Fraud at Tether-Backed Crypto Group Northern Data
Two former executives at Northern Data, a German-listed crypto and artificial intelligence infrastructure company backed by Tether, say they were fired after raising concerns about an 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 was “falsely misrepresenting the strength of its financial condition to investors, regulators and business partners” and “knowingly engaging in tax evasion potentially amounting to tens of millions of dollars.”
Northern Data said it “refutes the allegations in the strongest terms and will vigorously contest them to protect ourselves from false claims that harm our company and our business.”
Integrity is fundamental to Northern Data Group and its leadership. As a publicly traded company, we have comprehensive policies and procedures to ensure the accuracy of our financial reporting. Our 2022 accounts have received an unqualified audit opinion and we will shortly publish our 2023 audited financial statements.
Northern Data made headlines for other reasons this week, with Bloomberg News reports Monday that the company is considering an IPO in the United States for its AI-powered cloud computing and data center businesses:
Banks asked to bid for the role 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) as of Monday’s close.
Potential advisers are basing the valuation range partly on Northern Data’s ties to Tether Group, people familiar with the matter said. Tether’s backing has facilitated the purchase of more than $800 million of high-end Nvidia Corp chips used in generative artificial intelligence applications.
Northern Bitcoin was launched in 2018 as a pure-play cryptocurrency miner, then changed its name to Northern Data as grown through acquisition in high-performance computing data centers. 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 percent of Northern Data’s shares, after agreeing last year to a “strategic investment” which implied the exchange Nvidia GPUs for capital and a loan to shareholders. The former directors’ allegations predate his involvement.
Joshua Porter was named chief operating officer of Northern Data’s U.S. subsidiary in April 2022, then 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 “on the verge of insolvency,” a court filing dated June 21, 2024, states:
After receiving the promotion, Claimant Porter first began to have limited knowledge of Northern Data’s finances. Claimant Porter was shocked to discover that the company had a German tax liability of $30 million and additional liabilities of nearly $8 million, while simultaneously having only $17 million in cash on hand and a monthly burn rate of $3-4 million.
In addition to raising concerns about “the financial health of the company, its cash position and its solvency (or potential lack thereof)” with the management team, Porter also sought to expose what the complaint calls “rampant tax evasion” by Northern Data.
Accounting firm Deloitte declined 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 modifying its operating structure or tax treatment to avoid violating U.S. law, Northern Data “took steps to illegally evade U.S. taxes” for at least the 2021 fiscal year, the complaint says. It adds that Potter said 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 go into insolvency.”
It was around this time that Aroosh Thillainathanco-founder and CEO of Northern Data, has stopped responding to Potter’s communications, they say:
Claimant Porter’s concerns fell on deaf ears, so he declared his intention to directly approach the Northern Data Board of Directors to alert them to the companies uncontrolled illegal activity. Shortly thereafter, in apparent retaliation for his whistleblowing activity, Claimant Porter was illegally terminated.
Gulsen Kama was appointed Chief Financial Officer for North America at Northern Data in July 2022 and was promoted to Group Deputy Chief Financial Officer approximately two months later.
The complaint continues:
Following her promotion, Plaintiff Kama was actively exposing and then attempting to prevent Defendants from misrepresenting their financial position to potential auditors, tax advisors, and investors. At various times, 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 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 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 responsible officers of the illegal acts that they were committing fraud, on or about June 8, 2023, Plaintiff Kama was retaliated against and unlawfully terminated from her employment for her whistleblowing activities.
According to the plaintiffs, Kama conducted meetings with KPMG, Northern Data’s auditor for its 2020 and 2021 financials. In February 2023, at a meeting to sign off on the 2022 numbers, KPMG “raised concerns about the company’s liquidity position as a going concern” and requested documentation, the complaint says.
In early May, since KPMG had not yet been hired as auditor, Thillainathan reportedly told Kama to look for another firm:
While he said he looked at the top 20-25 ranked auditors, he said he didn’t care if they were ranked that high because no one cares who the auditors were. He said KPMG was being difficult and unreasonable but the underlying order was that he wanted a firm that would do the audit no questions asked. Plaintiff Kama attempted to fight back but Thillainathan ordered her to do as she was told and told her point blank that her head was on the chopping block.
A month later, KPMG had still not signed the engagement letter and relations between Kama, Thillainathan and group chief operating officer Rosanne Kincaid-Smith had allegedly deteriorated.
Kama allegedly issued a special “hold” notice to the accounting and finance department, requiring historical records to be preserved and requiring staff to include it in all communications with the supervisory board. The next day, Kama’s employment was terminated, according to the complaint.
Shareholders voted to approve a capital increase at the group’s annual general meeting on the following Monday, June 12, 2023. This amounts to a pattern of fundraising “followed by the issuance of emphatic press releases to drive up 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, highlighting “material uncertainty about the group’s ability to continue as a going concern” due to its reliance on bitcoin sales and lending to Tether shareholders.
The company last week delayed the publication of its 2023 audited financial statements to July 12thHe had previously said the report would be released by the end of the first half of 2024.
Its new auditor is Liebhart & Kollegen, according to a Regulatory filing May 2024. Liebhart describes himself in his LinkedIn Profile as a law firm with a single office in Stuttgart and “almost 15 team members.” He was contacted for comment.
KPMG and Tether did not respond to our requests for comment on the lawsuit.
In May, Northern Data successfully petitioned the court to have portions of the complaint redacted, arguing that they constitute “confidential and privileged communications protected by the attorney-client privilege and the attorney’s work product doctrine.” This week, the plaintiffs argued in a warehouse who reserved the right to contest the sealing order.
Here are the links for the complaint in court AND the sealing request.
Correction: An earlier version of this story stated that Northern Data had aimed to release its 2023 audited results by Q4 2023. The target was for 2022 results and the reference has been removed.
The story has been updated to include Northern Data’s statement.