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KBS REIT II Investors May Have Arbitration Claims

Money in WastebasketInvestors in KBS Real Estate Investment Trust II, Inc. (“KBS II” or the “Company”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to purchase KBS II was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation.  KBS II was formed as a Maryland REIT on July 12, 2007.  The Company is based in Newport Beach, CA, and in line with its business model, is “[i]nvested in a diverse portfolio of real estate and real estate-related investments.  As of September 30, 2017, the Company owned ten real estate properties (consisting of nine office properties and an office campus consisting of eight office buildings).”

Because KBS II is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who purchased shares through the initial public offering (“IPO”) upon the recommendation of a broker or financial advisor.  Pursuant to the Company’s offering, 182,681,633 shares of KBS II common stock were sold through its primary offering, for gross proceeds of $1.8 billion.  Further, the Company sold 30,903,504 shares of common stock under its dividend reinvestment plan, for gross proceeds of $298.2 million.  According to publicly available information through filings with the SEC, as of September 30, 2017, the Company had redeemed 25,723,025 shares sold under the offering for $244.6 million.

Non-traded REITs, such as KBS II, are complex and risky investment vehicles that do not trade on a national securities exchange.  Unfortunately, retail investors are often uninformed by their broker or money manager of the illiquid nature of non-traded REITs, meaning that investors who wish to sell their shares can only do so through a direct redemption with the issuer or through a fragmented and illiquid secondary market.

As it currently stands, KBS II has suspended its dividend reinvestment plan.  Furthermore, according to publicly available information, KBS II’s “[s]hare redemption program provides only for redemptions upon a stockholder’s death, ‘disqualifying disability’ or ‘determination of incompetence’” (as defined in the share redemption program document).

In June 2016, KBS II and KBS Real Estate Investment Trust I, Inc. announced plans to liquidate their assets.  Unfortunately, shareholders who wish to sell out of their illiquid investment position are left with few options.  For example, one secondary market that provides a limited platform for investors in non-traded REITs, CFX Alternative Trading, has recently listed shares of KBS II for only $4.45 per share.  Even when accounting for the Company’s prior distributions, it appears that investors who acquired KBS II shares at the offering price of $10 per share will incur substantial losses on their principal investment in the event that they seek to sell on a secondary market platform.

Brokers, and by extension their firm, are required to perform adequate due diligence on any investment that they recommend.  Further, brokers are required to conduct a suitability analysis in order to determine if the recommended investment is in keeping with the investor’s stated objectives and risk profile, in addition to informing their client of the risks associated with investing in a particular security.

If you have invested in KBS II, or another non-traded REIT, and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring considerable losses), you may be able to recover your losses in FINRA arbitration.  Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.