Menu icon Access the Business Officer Magazine menu by clicking or touching here.
Colorado Lawyer Magazine logo, click or touch this logo to return to the homepage Click or touch the Colorado Lawyer Magazine logo to return to the homepage. Search

People v. Schnorenberg.

2023 COA 82. No. 19CA0223. Colorado Securities Act—Securities Fraud and Other Prohibited Conduct—Material Misstatements or Omissions—Fraudulent Course of Business—Advice of Counsel Defense—Hearsay—Exclusion of Relevant Evidence on Grounds of Prejudice, Confusion, or Waste of Time—Jury Instructions.

September 21, 2023

Schnorenberg formed KJS Marketing Inc. to secure funding and recruit insurance agents for a related insurance marketing company. Over the next seven years, he established a succession of business entities to operate the insurance marketing business, securing over $15 million from more than 200 investors to finance the enterprises. In soliciting these investments, Schnorenberg did not disclose certain negative information to investors about his previous business dealings, including his bankruptcy discharge and civil judgments against him. He was charged, as relevant here, with 27 counts of securities fraud based on material misstatements or omissions and one count of securities fraud premised on a fraudulent course of business. Schnorenberg testified at trial that he had worked with the same securities attorney since 1990 and consulted this lawyer for legal advice on how to raise funds for his insurance business. Throughout the trial, defense counsel attempted to elicit testimony from Schnorenberg multiple times about the advice his securities lawyer had given him. The court sustained the People’s hearsay objections regarding specific advice that Schnorenberg’s securities attorney had given him, but it allowed Schnorenberg to testify that he had consulted with his securities lawyer and had received advice regarding how to raise capital for his insurance business. The trial court also declined to instruct the jury to consider the testimony for its effect on Schnorenberg’s state of mind, not for the truth of the matter asserted. Schnorenberg was convicted as charged.

On appeal, Schnorenberg argued that the trial court erred by excluding his testimony about his securities lawyer’s advice as hearsay, because it was offered for its effect on the listener rather than for its truth, and further erred by not instructing the jury that his good faith reliance on his lawyer’s advice was relevant to show that he lacked the requisite intent to commit the charged offenses. To prove securities fraud by material misstatement or omission, the prosecution must prove beyond a reasonable doubt that the defendant was aware that he was making an untrue statement of material fact or was aware that he omitted to state a material fact necessary to make the statement not misleading. To prove that a defendant committed securities fraud by engaging in a fraudulent course of business, the prosecution must prove beyond a reasonable doubt that the defendant was aware that he was engaging in an act or practice that would operate as a fraud or deceit upon a person. Evidence of a defendant’s good faith lack of awareness of these facts, or reliance on the advice of counsel, may thus negate the mental state element of a securities fraud charge. The court of appeals concluded that counsel’s advice regarding the materiality of a misstatement or omission is relevant to determining if a defendant had the requisite mental state to commit securities fraud, and an instruction explaining the relevance of counsel’s advice in securities fraud prosecutions is necessary when such evidence is admitted at trial. Here, Schnorenberg sought to introduce testimony about the contents of his lawyer’s advice to support his theory that he lacked the requisite mental state to commit securities fraud. Thus, he did not offer the testimony for its truth, but rather for its effect on his state of mind. And the danger of unfair prejudice did not substantially outweigh the probative value of the testimony. Accordingly, the trial court abused its discretion by excluding the testimony. Further, by rejecting the instruction on the ground that Schnorenberg had failed to present evidence about his securities lawyer’s advice, the trial court compounded its earlier error. Because the jury may have reached different verdicts on some or all of the charged counts if the testimony had been allowed, these errors were not harmless beyond a reasonable doubt.

Schnorenberg also argued, and the People conceded, that seven of the charged counts of securities fraud premised on material misstatements or omissions were barred by the statute of limitations. Here, the convictions on the criminal acts charged in counts one through seven of the indictment are barred by the statute of limitations and must be vacated.

The convictions for counts one through seven were vacated, the judgment of conviction for the remaining counts was reversed, and the case was remanded for further proceedings. The division also directed the trial court, on remand, to two recent Colorado Supreme Court decisions addressing the parameters of admissible expert testimony from securities law experts in securities fraud cases.

Official Colorado Court of Appeals proceedings can be found at the Colorado Court of Appeals website.

Back to the From the Courts Page