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

Two former executives at Northern Data, the German-listed cryptocurrency and AI infrastructure company backed by Tether, say they were fired after raising concerns about allegations that the CEO and COO had committed fraud.

in Complaints In a lawsuit filed last month in the Central District Court of California, Joshua Porter and Gulsen Khama allege that Northern Data “misrepresented the strength of its financial position to investors, regulators and business partners” and “knowingly evaded taxes amounting to potentially tens of millions of dollars.”

At this time, Northern Data has not responded to Alphaville’s questions about the lawsuit.

Northern Data is attracting attention this week for other reasons too. Bloomberg News reported on Monday The company is considering a U.S. IPO for its AI cloud computing and data center business.

Banks courted for the role are offering valuations in the range of $10 billion to $16 billion. [Northern Data’s] As of Monday’s closing price, its market capitalization was 1.3 billion euros ($1.4 billion).

Potential advisers are basing their valuation range in part on Northern Data’s partnership with Tether Group, which helped it buy more than $800 million worth of Nvidia Corp.’s high-performance chips used in generative AI applications, according to people familiar with the matter.

Northern Bitcoin went public in 2018 as a pure cryptocurrency miner and later changed its name to Northern Data. Growth through acquisitions The company plans to turn its eight crypto mining sites, six in North America, into high-performance computing data centers, as well as open cloud computing facilities in the United States and the United Kingdom.

Stablecoin issuer Tether said last year:Strategic Investments” With exchange About Nvidia GPUs The claims by former directors over the seizure of shares and shareholder loans predated the company’s involvement.

Joshua Porter was named chief operating officer of Northern Data’s U.S. subsidiary in April 2022 and promoted to president and CEO of North America in January 2023. He was fired in March 2023 after expressing concerns to his superiors that the company’s German parent was “on the brink of bankruptcy,” according to the complaint dated June 21, 2024.

After his promotion, Plaintiff Porter first began to gain some understanding of Northern Data’s financial situation, and he was shocked to learn that the company had a $30 million tax liability to Deutsch and approximately $8 million in additional debt, while having a cash balance of only $17 million and a monthly burn rate of $3 million to $4 million.

Porter expressed concerns to his executive team about the company’s “financial position, cash balance and ability to pay (or potential lack thereof)” and also sought to blow the whistle on what the complaint describes as “rampant tax evasion” at Northern Data.

The plaintiffs allege that accounting firm Deloitte refused to issue an option letter supporting Northern Data’s decision not to pay taxes to the IRS on cryptocurrency mining profits earned in the U.S. But instead of changing its business structure and tax treatment to avoid the risk of violating U.S. law, Northern Data “took actions to unlawfully evade U.S. taxes” for at least 2021, the complaint states. It adds that in Potter’s opinion, U.S. tax liability “could easily amount to tens of millions of dollars.”“An IRS audit could force Northern Data into bankruptcy,” he said.

These days, Alush ThillainathanThey claim that Mr Potter, co-founder and CEO of Northern Data, has stopped responding to their communications.

After his concerns were ignored, Plaintiff Porter expressed his intention to go directly to Northern Data’s board of directors to warn them about the rampant illegal conduct of both companies. Shortly thereafter, Plaintiff Porter was wrongfully terminated in apparent retaliation for his whistle-blowing actions.

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

The complaint continues:

After Plaintiff Kama was promoted, he actively exposed and attempted to stop Defendants from misrepresenting their financial situation to potential auditors, tax advisors and investors. At various times, Plaintiff Kama reported his concerns about the accounting and securities fraud he discovered to Northern Data’s global CEO, COO, Chairman of the Supervisory Board and the company’s Chief Legal and Compliance Officer, but to no avail, as the CEO and COO continued the accounting and securities fraud.

The CEO and COO intended to deceive existing and potential investors with a meeting scheduled for June 12, 2023. As a result of Plaintiff Kama repeatedly informing and warning the executives responsible for the misconduct that they were committing fraud, on or about June 8, 2023, Plaintiff Kama was retaliated against for his whistleblowing activities and was wrongfully terminated.

According to the plaintiffs, Kama handled meetings with Northern Data’s auditors, KPMG, regarding the company’s financial statements for 2020 and 2021. In February 2023, during a meeting to approve the 2022 figures, KPMG “expressed concerns about the company’s liquidity position as a going concern” and asked for documents, according to the complaint.

In early May, as KPMG had not yet been contracted as auditor, Thillainathan allegedly told Cama to find another firm.

He told her to look at the top 20-25 auditors, but said he didn’t care if they were that high up because no one cares who the auditor was. He argued that KPMG was difficult and unreasonable, but the underlying directive was that they wanted a firm that would carry out the audit no questions asked. The plaintiff, Kama, tried to argue back, but Thillainathan ordered her to do as instructed and made it clear that her head would be chopped off.

A month later, KPMG still had not signed the contract and relations between Mr Kama, Mr Thillainathan and group chief operating officer Roseanne Kincaid-Smith were allegedly deteriorating.

Kama reportedly served a special “hold” notice on the accounting and finance department, demanded the preservation of historical records, and asked staff to include him in all communications with the supervisory board. The next day, he was fired, according to the lawsuit.

Shareholders voted to approve the recapitalization The company plans to sell the shares at the group’s annual general meeting next Monday, on 12 June 2023. This fits with a pattern of “issuing exaggerated press releases to inflate share prices” following fundraising, the plaintiffs allege.

Northern Data has raised capital 13 times since December 2020, according to Berenberg data. [Hi-res]

ZettaHash is a wholly owned subsidiary of Tether. © Berenberg

KPMG eventually delivered its audit report on Northern Data’s 2022 financial position in March 2024, warning that there was “significant uncertainty about the group’s ability to continue as a going concern” due to its reliance on bitcoin sales and Tether shareholder loans.

The company last week postponed the release of its audited financial statements for fiscal 2023. Until July 12thThe report states: Q4 2023after that By the end of the first half 2024.

The new auditing firm is Liebhardt & Collegen. Regulatory filings in May 2024Liebhardt is LinkedIn Profile The firm is a single-office law firm based in Stuttgart with “approximately 15 team members” and 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 redact parts of the complaint, arguing that they were “confidential and privileged communications protected by the attorney-client privilege and attorney work product doctrines.” Documents to be submitted They said they reserved the right to challenge the sealing order.

Here is the link Court complaint and Application for Seal.

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