Ex-directors allege fraud at Tether-backed crypto group Northern Data

Two former executives of Northern Data, a German-listed crypto and AI infrastructure company backed by Tether, say they were sacked after raising concerns about alleged fraud they claim was being perpetrated by its chief executive and chief operating officer. 

In a complaint filed last month at the California 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 “was knowingly committing tax evasion to the tune of potentially tens of millions of dollars.”

Northern Data said it “refutes the allegations in the strongest terms, and we are contesting them vigorously to protect ourselves against false assertions which damage our company and our business”:

Integrity is paramount to Northern Data Group and its leadership. As a publicly listed company we have comprehensive policies and procedures to ensure the accuracy of our financial reporting. Our 2022 accounts received an unqualified audit opinion and we will release our 2023 audited financials shortly.

Northern Data has been making headlines for other reasons this week, with Bloomberg News reporting on Monday that the company has been investigating a US IPO for its AI cloud computing and data centre businesses:

Banks asked to pitch for a role have suggested valuations from about $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 in part on Northern Data’s tie-up with Tether Group, people familiar with the matter have said. The Tether backing has facilitated the purchase of more than $800 million of high-end Nvidia Corp chips used for generative AI applications.

Northern Bitcoin floated in 2018 as a pure-play crypto miner, then changed its name to Northern Data as it grew by acquisition into high-performance computing data centres. It plans to open US and UK cloud computing facilities to add to its eight crypto-mining sites, six of which are in North America.

Stablecoin issuer Tether owns 51 per cent of Northern Data shares, after last year agreeing to a “strategic investment” that involved swapping Nvidia GPUs for equity and a shareholder loan. The former directors’ allegations predate its involvement.

Joshua Porter was appointed chief operating officer of Northern Data’s US subsidiary in April 2022, then in January 2023 was promoted to North America president and CEO. He was sacked in March 2023 after raising concerns with his superiors that the company’s German parent was “borderline insolvent”, a court complaint dated June 21 2024 alleges:

After receiving the promotion, Plaintiff Porter for the first time began getting a limited understanding of Northern Data’s financials. Plaintiff Porter was shocked to learn that the company had a $30M German tax liability and additional liabilities of almost $8M while simultaneously having only $17M cash on the balance and a monthly burn rate of $3M-$4M.

As well as raising concerns about “the company’s financial state, cash position and solvency (or potential lack thereof)” with the executive leadership team, Porter also sought to blow the whistle on what the complaint calls Northern Data’s “rampant tax evasion”.

Accounting firm Deloitte refused to give an option letter supporting Northern Data’s decision not to pay the IRS any taxes on crypto mining profits generated on US soil, the plaintiffs allege. But instead of changing its operational structure or tax treatment to not risk violating US law, Northern Data “took actions to unlawfully avoid US taxes” at least for the year 2021, the complaint says. It adds that in Potter’s opinion the US 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 around this time that Aroosh Thillainathan, Northern Data’s co-founder and CEO, stopped responding to Potter’s communications, they allege:

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 of the companies’ unchecked illegal activity. Shortly after, in obvious retaliation for his whistleblowing activity, Plaintiff Porter was illegally terminated.

Gulsen Kama was appointed Northern Data’s North America chief financial officer in July 2022 and was promoted to group deputy chief financial officer around two months later.

The complaint continues:

Following her promotion, Plaintiff Kama was actively exposing and then attempting to keep Defendants from falsely misrepresenting their financial position to potential auditors, tax advisors and investors. At various junctures, Plaintiff Kama reported her concerns regarding the accounting and securities fraud that she was finding to Northern Data’s global CEO, COO, the Chair 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 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 officers that were responsible for the illegal acts that they were committing fraud, on or about June 8, 2023, Plaintiff Kama was retaliated against and illegally terminated for her whistleblowing activities.

According to the plaintiffs, Kama handled meetings with KPMG, Northern Data’s auditor for its 2020 and 2021 financials. In February 2023, in a meeting about signing off its 2022 numbers, KPMG “raised concerns about the liquidity position of the company being a going concern” and asked for documentation, the complaint says.

By early May, with KPMG still not engaged to be auditor, Thillainathan allegedly told Kama to look for another firm:

While he said to look at the top 20-25 ranked auditors; he expressed that he did not care if they were ranked that high, because no one cares who the auditors are. He claimed KPMG was being difficult and unreasonable, but the underlying command was that he wanted a company that would perform the audit with no questions asked. Plaintiff Kama attempted to push back but Thillainathan ordered her to do as instructed 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 had allegedly deteriorated between Kama, Thillainathan and group chief operating officer Rosanne Kincaid-Smith.

Kama reportedly issued a special “hold” notice to the accounting and finance department requesting the preservation of historical records, and asking that staff loop her into all communications with the supervisory board. The next day, according to the complaint, Kama’s employment was terminated.

Shareholders voted to approve a capital raise at the group’s AGM on the following Monday, June 12, 2023. This matches a pattern of fundraisings “followed by issuing hyped-up press releases to drive up the stock price,” the plaintiffs allege.

Berenberg data shows Northern Data has raised cash 13 times since December 2020. [Hi-res]

KPMG eventually 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 the Tether shareholder loan.

The company last week delayed the publication of its 2023 audited financials to July 12. It 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 May 2024 regulatory filing. Liebhart describes itself on its LinkedIn profile as a Stuttgart single-office law firm with “almost 15 team members”. It has been contacted for comment.

KPMG and Tether did not respond to our requests to comment on the court action.

Northern Data successfully petitioned the court in May to have portions of the complaint redacted, saying these constitute “confidential and privileged communications protected by the attorney-client privilege and attorney work product doctrine.” The plaintiffs this week said in a filing that they were reserving the right to challenge the sealing order.

Here are links to the court complaint and the application to seal.

Correction: an earlier version of the story said Northern Data had targeted publishing its audited 2023 results by the fourth quarter of 2023. The target was for 2022 results and the reference has been removed.

The story has been updated to include Northern Data’s statement.