Corporate Counsel Daily, Trial court erroneously excluded defendant’s testimony and jury instruction, (Jun 25, 2025)

By Jay Fishman, J.D.

Defendant’s good faith reliance on his attorney’s advice negated the mens rea element of the securities fraud counts.

The Colorado Supreme Court affirmed the Colorado Court of Appeals decision that the Colorado trial court reversibly erred by: (1) excluding the defendant’s testimony about his securities attorney’s advice; and (2) rejecting his jury instruction about that advice. The court remanded the case for a new trial (People v. Schnorenberg, 2025 CO 43 (Colo. Sup. Ct. Jun. 23, 2025)).

The defendant’s alleged fraud. Between 2009 and 2015, the defendant through his just-formed company solicited over $15 million from approximately 250 investors. The agreement promised to repay them at 12 percent interest per year. But unbeknownst to the investors:

• The Colorado Securities Division sued and permanently enjoined the defendant from selling securities in Colorado;

• He filed for bankruptcy five years before forming the company; and

• He did not inform the investors that: (i) he failed to repay prior investors; (ii) his companies carried large debt loads; (iii) civil judgments were entered against him for unpaid debts; (iv) he never satisfied those judgments; (v) some of his companies failed; and (vi) he failed to provide the prior investors with the companies’ quarterly and annual financial statements.

Colorado lawsuit. The State of Colorado charged the defendant with 25 counts of securities fraud under the Colorado Securities Act Sections 11-51-501(1)(b) and (c). The defendant planned to defend against the charges by arguing he acted in good faith reliance on the advice of his securities lawyer, and he intended to call him as a witness except that the attorney was out of the country for the rest of the trial.

Trial court decisions. First, the trial court sided with the People of Colorado by denying the defendant’s motion for a continuance because he needed his attorney’s testimony to defend himself. Then defense counsel asked him whether he believed he was required to make the abovementioned disclosures to the investors based on conversations he had with his lawyer. But the People objected on hearsay grounds, and the court sustained the objection.

Thereafter, defense counsel proposed a limited jury instruction that would have confirmed the testimony was being offered only to show the effect of the lawyer’s advice on the defendant. The court, however, denied the jury instruction on the same hearsay grounds. This decision resulted in the defendant’s being allowed to testify only generally that he acted after obtaining his counsel’s advice rather than enabling him to testify about the specific advice his lawyer gave him. Lastly, the defendant requested the court to instruct the jury, as part of the final charge, that “in determining whether Mr. Schnorenberg [the defendant] acted willfully, you may consider the evidence as it relates to good faith reliance on the advice of counsel.” But the court again refused to give this proposed jury instruction, ultimately leading to the defendant’s conviction on all 25 counts.

Appellate court reverses. The appellate court vacated seven of the convictions as time-barred, reversed the remaining convictions and remanded the case for further proceedings. Pertaining to the non-time-barred convictions, the court declared the trial court erred in preventing the defendant from testifying about his lawyer’s advice pertaining to the disclosures he needed to make to prospective investors. The court proclaimed that a defendant’s good faith reliance on his advice of counsel could negate the mens rea element of the securities fraud counts at issue. The court, furthermore, said this advice was not hearsay. Finally, the court determined the trial court erred in rejecting the jury instruction that good faith reliance on the advice of counsel was relevant to whether the defendant had acted willfully.

Colorado Supreme Court affirms. Throughout its analysis, the Colorado Supreme Court set forth a number of Colorado higher court precedents supporting the appellate court’s decision finding reversible error on similar grounds. The court pointed to the relevant Colorado fraud provisions on which the defendant was charged:

1. Section 11-51-501(1)(b): it is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they are made, not misleading; and

2. Section 11-51-501(1)(c): it is unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

The court further remarked that under Colorado law, the mental state (or mens rea) for violations of the subsections 1(b) and 1(c) is “willfully,” which equates to “knowingly.” But the crux of the case has been the People’s contending that “willfully” applies only to the acts of making an untrue statement or omitting facts within the meaning of subsection 1(b), or to a defendant’s conducting an act, practice, or course of business under 1(c). The trial court agreed but the appellate court did not, and both the appellate and supreme courts sided with the defendant’s argument that “willfully” also applies to the element of materiality under 1(b) and to the element of fraud or deceit under 1(c). And because the mens rea of “willfully” applies to each element of securities fraud, a defendant’s reliance on advice of counsel is relevant in a securities fraud prosecution and tends to negate a finding that the defendant had the requisite mens rea for securities fraud.

This is No. 2025 CO 43.

Judge: Gabriel, R.

Attorneys: Philip J. Weiser, Colorado Attorney General, for The People of the State of Colorado. Lynn C. Hartfield (Law Office of Lynn C. Hartfield, LLC) for Kelly James Schnorenberg.

Companies: The People of the State of Colorado

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