UPDATE: In October 2024, Joshua Porter and Garsen Cama withdrew all claims reported in this AV post and the lawsuit was dismissed. Learn more about the FTAV report here.
Two former executives at Northern Data, a German-listed cryptocurrency and AI infrastructure company backed by Tether, have raised concerns about alleged misconduct committed by the company's CEO and chief operating officer. He said he was fired.
In a complaint filed last month in California's Central District Court, Joshua Porter and Gulsen Kama say Northern Data “misrepresented its financial strength to investors, regulators, and business partners.” '' and “intentionally committed tax evasion to the federal government.'' It could potentially be in the tens of millions of dollars. ”
Northern Data said it “refutes this allegation in the strongest terms and is vigorously contesting it to protect ourselves from false claims that harm us and our business.”
Integrity is of paramount importance to Northern Data Group and its leadership. As a publicly traded company, we have comprehensive policies and procedures in place to ensure the accuracy of our financial reporting. We have received an unqualified audit opinion on our 2022 financial results and expect to release our 2023 audited financial statements shortly.
Northern Data has been in the news for another reason this week, with Bloomberg News reporting Monday that the company is considering a U.S. IPO for its AI cloud computing and data center business.
Banks approached for the role have suggested a valuation of about $10 billion to $16 billion. That compares with a market capitalization of 1.3 billion euros ($1.4 billion) (from Northern Data) as of Monday's close.
Potential advisers are basing their valuation range in part on Northern Data's partnership with Tether Group, the people said. Tether's help facilitated more than $800 million in purchases of Nvidia Corp's high-end chips used in generative AI applications.
Northern Bitcoin emerged as a pure-play cryptocurrency miner in 2018, but later changed its name to Northern Data as it grew through acquisitions into high-performance computing data centers. The company plans to open cloud computing facilities in the US and UK, in addition to eight crypto mining sites, six of which will be in North America.
Stablecoin issuer Tether owns 51 percent of Northern Data after agreeing to a “strategic investment” last year that included swapping Nvidia GPU shares for shareholder loans. The allegations by the former directors predate the company's involvement.
Joshua Porter was appointed Chief Operating Officer of Northern Data's U.S. subsidiary in April 2022 and was subsequently promoted to President and CEO of North America in January 2023. He was fired in March 2023 after he raised concerns with his superiors that the company's German parent company was “on the verge of bankruptcy,” according to a June 21, 2024, court complaint.
After receiving his promotion, Plaintiff Porter first began to have a limited understanding of Northern Data's finances. Plaintiff Porter claims that the company owes $30 million in taxes in Germany and has debts of nearly $8 million more, while only having a cash balance of $17 million and a monthly burn rate of $3 million. I was shocked to find out it was $4 million.
Porter expressed concerns to the executive team about “the company's financial condition, cash position, and solvency (or potential lack thereof)” and what the complaint calls Northern Data's “rampant tax evasion.” attempted to blow the whistle on the matter.
Accounting firm Deloitte has refused to submit an option letter supporting Northern Data's decision not to pay taxes to the IRS on cryptocurrency mining profits generated in the continental United States, plaintiffs allege. . However, instead of changing its operating structure and tax treatment to avoid the risk of violating U.S. law, Northern Data “took steps to unlawfully avoid U.S. taxes” through at least 2021, the complaint says. be. Additionally, in Potter's opinion, the U.S. tax liability “could easily amount to tens of millions of dollars” and added that “an IRS audit could send Northern Data into bankruptcy.” .
They allege that it was around this time that Northern Data's co-founder and CEO, Allush Thillainathan, stopped responding to Mr. Potter's communications.
Plaintiff Porter's concerns went unheeded, so he went directly to Northern Data's board of directors to warn them of the company's unchecked illegal practices. Shortly thereafter, Plaintiff Porter was wrongfully terminated in apparent retaliation for his whistleblowing activities.
Mr. Garsen Cama was appointed Northern Data's North American Chief Financial Officer in July 2022 and was promoted to Group Deputy Chief Financial Officer approximately two months later.
The complaint continues as follows.
After his promotion, Plaintiff Karma actively sought to expose and prevent Defendants from misrepresenting their financial status to potential auditors, tax advisors, and investors. At various junctures, Plaintiff Karma raised 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, to no avail. The COO was perpetuating accounting and securities fraud.
The CEO and COO intended to mislead existing and potential investors at their next meeting scheduled for June 12, 2023. As a result, on June 8, 2023, Plaintiff Kama repeatedly notified and warned the officers responsible for the illegal acts that they were committing illegal acts or were committing fraud regarding the illegal acts. Plaintiff Kama was retaliated against and wrongfully terminated for his whistleblowing activities.
According to the plaintiffs, Khama conducted meetings with Northern Data's 2020 and 2021 financial auditor, KPMG. In February 2023, during a meeting to approve the 2022 numbers, KPMG “expressed concerns about the company's going concern status” and requested documentation, according to the complaint. .
By early May, Thillainathan told Khama to find another firm because KPMG had not yet been appointed as its auditor.
He said he looks at the top 20 to 25 auditors, but he said no one cares who the auditor is, so even if an auditor is ranked that high, He expressed that he didn't care. He claimed that KPMG's response was difficult and unreasonable, but the underlying reason was that he wanted a firm that would perform the audit without asking any questions. The complainant, Kama, tried to push back, but Thillainathan ordered him to do as instructed and confessed that his head was on the cutting board.
A month later, KPMG still had not signed the engagement letter, and relations between Mr. Khama, Mr. Thillainathan, and group chief operating officer Roseanne Kincaid-Smith were said to have deteriorated.
Khama reportedly issued a special “hold” notice to the finance department, requesting preservation of past records and requiring staff to include her in all communications with the supervisory board. . The next day, Kama's employment was terminated, according to the complaint.
Shareholders voted to approve the capital increase at the Group's general meeting the following Monday, 12 June 2023. This, the plaintiffs allege, is consistent with a pattern of raising money “after issuing exaggerated press releases to inflate stock prices.”
Northern Data has raised cash 13 times since December 2020, according to Berenberg data. (high resolution)
KPMG ultimately submitted its audit report on Northern Data's 2022 financials in March 2024, stating that its reliance on Bitcoin sales and Tether shareholder financing had “significantly compromised the group's ability to continue as a going concern.” “certainty.''
The company last week postponed the publication of its 2023 audited financial report to July 12. It previously said the report would be published by the end of the first half of 2024.
That new auditor is Liebhardt & Collegen, according to a May 2024 regulatory filing. In its LinkedIn profile, Liebhardt describes itself as a single-office law firm in Stuttgart with “almost 15 team members.” We have been contacted for comment.
KPMG and Tether did not respond to requests for comment on the court case.
In May, Northern Data successfully petitioned the court to redact portions of the complaint, which it said were “confidential and privileged communications protected by the attorney-client privilege and attorney work product doctrine.” claimed to be the case. The plaintiffs said in a filing this week that they reserve the right to challenge the sealing order.
Here is a link to the court complaint and application for sealing.
Updated July 23: Northern Data has filed a motion to dismiss Kama and Porter's federal lawsuit as “a textbook example of malicious litigation.”
The motion, filed last Monday, reads: “Porter and Kama are former employees of Northern Data who had an unproductive and short tenure with the company. Kama was terminated for cause. I was laid off in a wave of layoffs.”
A lawyer for the German company denied claims of fraud, saying the federal filings were “replete with inaccuracies.”
(Plaintiffs) were unable to defend the fraud allegations in detail. At the heart of each of the plaintiffs' six claims is an alleged systematic accounting and tax fraud committed by the defendants “potentially in the tens of millions of dollars.” These are sensational claims, but they are completely unsubstantiated. Nowhere in the FAC does the plaintiff provide specific information about who committed the wrongdoing, what, when, and where, as required under Rule 9(b) and this court's action imposing a higher pleading standard. It is not asserted.
They also argued that because Northern Data's U.S. subsidiary is incorporated in Delaware and does business primarily in Virginia, California courts have “no jurisdiction” in the lawsuit. They argue that the case should not be heard in California court.
The motion notes that Northern Data released audited financial statements for 2023 prior to filing.
In their conclusion, the lawyers wrote:
This unfortunate lawsuit is a well-concealed effort by former employees to extract additional compensation from Northern Data. This action was filed in a state where personal jurisdiction cannot be exercised over defendants. This is intended to raise whistle-blowing on accounting and tax issues that are not specifically mentioned. It alleges frivolous misrepresentation and misappropriation claims, which are refuted by the very documents cited. Moreover, they are illegally using privileged information that belongs to the company rather than the plaintiff. Such strike lawsuits harm companies. Abusing terms like “tax evasion” and “securities fraud” without supporting facts is irresponsible, which is why Rule 9(b) serves an important review function. The motion to dismiss and strike should be granted and the FAC should be dissolved.
The motion will be considered at a public hearing on August 19th. You can read the full text here.
Correction: A previous version of the original article, dated July 5, said Northern Data aimed to publish audited 2023 financial results by the fourth quarter of 2023. The goal is to close in 2022 and the mention has been removed.
The original article has also been updated to include a statement from Northern Data.
