Two former executives at Northern Data, a Germany-listed crypto and AI infrastructure company backed by Tether, say they were fired after raising concerns about alleged fraud they say was committed by the CEO and COO.
In a complaint filed last month in U.S. District Court for the Central District of California, Joshua Porter and Gulsen Kama allege that Northern Data “falsely misrepresented the strength of its financial condition to investors, regulators, and business partners” and “knowingly evaded taxes worth potentially tens of millions of dollars.”
Northern Data has not yet responded to Alphaville’s inquiries about the lawsuit.
Northern Data made headlines this week for other reasons. Bloomberg News reported Monday that the company is exploring a U.S. IPO for its AI cloud computing and data center businesses:
Banks asked to pitch for a role have suggested valuations of around $10 billion to $16 billion. That compares to [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 partnership with Tether Group, people familiar with the matter said. Tether’s backing has enabled the purchase of more than $800 million in high-end Nvidia Corp chips for generative AI applications.
Northern Bitcoin launched in 2018 as a pure-play crypto miner, then changed its name to Northern Data as it grew through acquisitions in high-performance computing data centers. It plans to open U.S. and U.K. cloud computing facilities to expand its eight crypto mining sites, 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 swapped Nvidia GPUs for stock and a shareholder loan. The allegations by former executives predate the 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 “near bankruptcy,” a June 21, 2024, court filing alleges:
After receiving the promotion, plaintiff Porter began to gain a limited understanding of Northern Data’s finances for the first time. Plaintiff Porter was shocked to learn that the company had a German tax debt of $30 million and additional liabilities of almost $8 million, while at the same time having only $17 million in cash on its balance sheet and a monthly burn rate of $3 million – $4 million.
In addition to raising concerns about “the financial condition, cash position and solvency (or potential lack thereof) of the Company” with the management team, Porter also attempted to become a whistleblower on what prosecutors call Northern Data’s “widespread tax evasion.”
Accounting firm Deloitte refused to provide an option letter supporting Northern Data’s decision not to pay taxes to the IRS on crypto mining profits generated on U.S. soil, the plaintiffs allege. But rather than changing its operational structure or tax treatment to avoid the risk of violating U.S. law, Northern Data “took steps to unlawfully avoid U.S. taxes,” at least for the year 2021, the complaint says. It adds that Potter estimates the U.S. tax liability “could easily be in the tens of millions of dollars“and that “an IRS audit could potentially force Northern Data out of business.”
It was around this time that Aroosh Thillainathan, co-founder and CEO of Northern Data, stopped responding to Potter’s communications. They claim:
Plaintiff Porter’s concerns fell on deaf ears, so he stated that he planned to go directly to the Northern Data Board of Directors to warn them of the companies unchecked illegal activities. Shortly thereafter, in apparent retaliation for his whistleblowing activity, plaintiff Porter was illegally fired.
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 further states:
Following her promotion, plaintiff Kama actively engaged in exposing and then attempting to prevent defendants from falsely misrepresenting their financial positions to potential accountants, tax advisors, and investors. At various times, plaintiff Kama raised her concerns about the accounting and securities fraud she discovered with the company’s global CEO, COO, chairman of the board of trustees, and chief legal and compliance officer, but to no avail, as the CEO and COO perpetuated the accounting and securities fraud.
The CEO and COO planned to mislead existing and potential investors at an upcoming meeting scheduled for June 12, 2023. Because Plaintiff Kama repeatedly informed and warned the officials responsible for the illegal acts that they were committing fraud, Plaintiff Kama was prosecuted and wrongfully terminated for her whistleblowing activities on or about June 8, 2023.
According to the plaintiffs, Kama handled meetings with KPMG, Northern Data’s auditor, for the 2020 and 2021 financials. In February 2023, during a meeting to approve the 2022 numbers, KPMG “expressed concerns about the company’s liquidity position as a going concern” and requested documentation, the complaint says.
In early May, when KPMG had still not been hired as an accountant, Thillainathan is said to have instructed Kama to look for another firm:
While he said we should look at the top 20-25 auditors, he indicated that he did not care if they were ranked that high because no one cares who the auditors are. He claimed that KPMG was being difficult and unreasonable, but the underlying order was that he wanted a company that would do the audit without asking questions. Plaintiff Kama tried to fight back, but Thillainathan ordered her to do as she was told and bluntly told her 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 the group’s chief operating officer, Rosanne Kincaid-Smith, were said to have deteriorated.
Kama allegedly sent 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 board of trustees. Kama’s employment was terminated the next day, the complaint said.
Shareholders voted to approve a capital increase at the group’s annual general meeting of shareholders on the following Monday, June 12, 2023. This is consistent with a pattern of fundraising “followed by the issuing of exaggerated press releases to inflate the share price,” the plaintiffs allege.
Berenberg data shows that Northern Data has raised money 13 times since December 2020. [Hi-res]
KPMG eventually delivered its auditor’s report on Northern Data’s 2022 financial results in March 2024, which noted “material uncertainty about the group’s ability to continue operating as a going concern” due to its reliance on bitcoin sales and Tether’s shareholder loan.
The company last week delayed the release of its audited 2023 financials until July 12. Previously, the company had said the report would be released in the fourth quarter of 2023, and then at the end of the first half of 2024.
The new auditor is Liebhart & Kollegen, according to a regulatory filing from May 2024. Liebhart describes itself on its LinkedIn profile as a Stuttgart-based law firm with one office and “nearly 15 team members.” It has been reached 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 portions of the complaint struck out, arguing they “constitute confidential and privileged communications protected by the attorney-client privilege and attorney work product doctrine.” The plaintiffs said in a filing this week that they reserve the right to challenge the sealing order.
Here you will find links to the complaint to the court and the application for sealing.