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Photograph by R. V. Scheide

Maverick: Retiree Don Huberty lost a small fortune in the stock market and blames broker Charles Schwab.

On His Own

Legal battle sheds light on Social Security reform

By R. V. Scheide

By all accounts, 76-year-old retiree Don Huberty has always been a standup, take-charge kind of guy. A maverick. When communism threatened to topple the nations of Southeast Asia, Huberty flew cargo planes in Korea for the U.S. Air Force. When a grade-school girl walking home was struck and killed by an automobile in the Santa Rosa neighborhood where Huberty and his wife were raising their three children, he and a neighbor donated their own labor and money to construct gravel pathways so kids didn't have to walk in the street. Doing the right thing has always come naturally to this proud, self-proclaimed Reagan Republican.

Huberty spent most of his working career building single-family spec homes in Sonoma County. He made a good living, enough to begin investing small amounts in the stock market in the 1980s. His broker was the then up-and-coming discount house Charles Schwab, headquartered in San Francisco.

In the early 1990s, Huberty, divorced, retired and moved to Grants Pass, Ore. The cold didn't suit him, so in 2000, he moved to Costa Rica, where he purchased a condominium.

"They like old rich gringos like me down there," jokes Huberty, a shambling six-footer with a shock of gray hair pasted over a weathered face. With his Schwab portfolio then valued at more than $400,000 and the $700 a month he receives in Social Security easily covering his living expenses, he settled into a routine of tennis, lounging around and "world-champion sleeping."

A rude awakening was in store.

"Two thousand and two, that's when the money went," he recalls ruefully. A large chunk of Huberty's stock holdings were in Conseco Inc., the Indiana-based financial-services conglomerate that, after WorldCom and Enron, filed for the third largest Chapter 11 bankruptcy protection in U.S. history in December 2002. In hindsight, Huberty admits he should have watched the stock more carefully. But he also questions the advice he says he was repeatedly given by Schwab brokers via telephone.

"I kept thinking Conseco would come back, and Schwab was saying it had a C rating," he says. Schwab's highly touted Equity Rating System uses a computer program--as opposed to a supposedly more error-prone human analyst--to rate stocks on a scale of A to F. In Schwab's system, a C means to "hold" the stock. Huberty held on--all the way to the bottom. The value of his portfolio, once more than $400,000, plummeted to less than $50,000. He'd lost his life's savings.

Conseco now faces several class-action lawsuits filed by shareholders who collectively lost millions when the company went bankrupt; Huberty briefly considered joining one of the suits, then changed his mind. "I didn't want to be the 2,000th guy in line to fight over the last 25 cents," he says. Ever the maverick, he went his own way, suing Charles Schwab in Sonoma County Superior Court.

Not Charles Schwab, the company. Charles Schwab, the man.

 

Stories like Huberty's, which are legion in the wake of the recent tech-bubble collapse, are not likely to be mentioned in George W. Bush's stepped-up campaign to partially privatize Social Security.

Social Security's raison d'Ítre is to provide minimal retirement, disability and death benefits to lower-, middle- and upper-class individuals alike. It was never intended as a sole source of retirement income; rather, it's a government-guaranteed cushion against economic downturn.

Huberty lost most of his life savings in the stock market, but he still gets $700 a month from Social Security. Without it, he'd be financially sunk, or at least living back in Sonoma County with one of his three grown children.

President Bush paradoxically proposes that individuals be allowed to invest some of the money that goes to Social Security--the social insurance fund that partially protects all of us from stock market volatility--in the stock market. In his State of the Union address, the president explained how it would work: "If you are a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future," he said, comparing chalk to cheese by noting that the stock market has a better rate of return on investment than Social Security. "Best of all," he touted, "the money in the account is yours, and the government can never take it away."

No, the government can't take it away--but its value can sure be wiped out in a hurry, at any time, by a downturn in the market or an act of corporate malfeasance, which hit main-street investors like Huberty with a double-whammy in the case of Conseco's bankruptcy. Such economic catastrophes are the very reason Social Security came into being 70 years ago, and they haven't ceased to exist.

Not surprisingly, both Charles Schwab "the Man," as the 67-year-old founder and owner of the company is affectionately known, and various high-level employees of his firm have been vocal proponents of privatization. Schwab, a maverick in his own right, pioneered the concept of providing limited brokerage services at a discount to individual mom-and-pop investors. The concept exploded with the advent of online trading in the 1990s, and Schwab is now a billionaire several times over.

But the financial-services industry was hit hard when the tech bubble popped in 2000, and it is desperate to woo frightened investors back to the market, where individual investment has flattened out at $200 billion per year. It's estimated that Bush's proposal to invest up to one-third of the payroll tax in the stock market could generate as much as $75 billion in new individual investment.

Until the summer of 2002, Don Huberty felt fairly empowered by his Schwab portfolio. But when things went wrong, he found out just how little power the individual investor has.

 

Huberty is the first person to admit that he occasionally tilts at windmills.

When he sued Charles Schwab the man, he truly hoped to confront Schwab in person, in front of a jury, as he believes is required by the Seventh Amendment to the U.S. Constitution. But woe be unto the litigant who acts in propria persona. As suits his character, Huberty has taken on Schwab by himself, with no outside legal help. Keesal, Young & Logan, the San Francisco law firm representing Charles Schwab Corp., quickly made mincemeat of Huberty's claims after the suit was filed last July.

Through its attorneys, the company denied that Huberty had lost any money at all, let alone the $200,000 he was requesting in damages. It denied ever giving him advice on stocks. Furthermore, the attorneys pointed out, Huberty had agreed to settle any dispute he might have with the company through arbitration, not litigation, thanks to a clause buried in the 26th paragraph of the contract he signed when he opened his third Schwab account in 1989. "We think his case is without merit, and we intend to defend it," says Schwab spokesperson Glen Mathison.

Since the initial hearing, Huberty has been trying to hurdle the obstacles thrown up by the arbitration clause with little success. It's maddening. How can Schwab Corp. say Huberty wasn't damaged when his own financial records demonstrate otherwise? How can Schwab say it doesn't give advice, given the highly publicized debut of its Equity Rating System in 2002, and the glossy magazine advertisements promoting such services from as early as 2001?

So far, the Sonoma County Superior Court has rebuffed his attempts to waive the arbitration; Hubert has one more court appearance in late February. If that fails, he plans to appeal to a higher court.

Even if he's successful in getting the case heard before a jury, buried at the bottom of a bulleted 12-point list in Keesal, Young & Logan's response to Huberty's charges is a statement that defines just what this ownership society comprised of citizen shareholders proposed by President Bush is all about: "The Defendant [Schwab] alleges that all risks associated with the purchase and sale of the investments in plaintiff's accounts were understood by him, and plaintiff willingly and voluntarily assumed the risks of engaging in such transactions."

Translation: In George W. Bush and Charles Schwab's future, you're on your own. How empowering is that?

Yet Huberty supports the concept of Social Security privatization. He remains a loyal Reagan Republican. But he intends to fight Charles Schwab until the end. "I had to give up tennis last year, my knees are down to bone-on-bone," he says, hobbling down the stairs on his way to pack for the airport. "But I'm still a world-champion sleeper."

He may as well be; he's got nothing but time. The money is already gone.

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From the February 9-15, 2005 issue of the North Bay Bohemian.

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