People v. Schnorenberg

541 P.3d 1

2023 COA 82

2023 COA 82

The PEOPLE of the State of Colorado, Plaintiff-Appellee,

v.Kelly James SCHNORENBERG, Defendant-Appellant.

Court of Appeals No. 19CA0223

Colorado Court of Appeals, Div. VI.

Announced September 21, 2023

Douglas County District Court No. 16CR187, Honorable Theresa Slade, Judge

Philip J. Weiser, Attorney General, Brittany Limes Zehner, Assistant Solicitor General, Denver, Colorado, for Plaintiff-Appellee

Lynn Hartfield, Alternate Defense Counsel, Denver, Colorado, for Defendant-Appellant

Opinion by JUDGE TAUBMAN^*

¶ 1 Defendant, Kelly James Schnorenberg, appeals his judgment of conviction for twenty-eight counts of securities fraud. We vacate seven of those convictions, reverse the judgment as to the remaining convictions, and remand the case for further proceedings.

I. Background

¶ 2 In 2008, Schnorenberg formed KJS Marketing Inc. with the stated purpose of securing funding and recruiting 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. To finance these enterprises, he solicited investments, securing over $15 million from more than 200 investors. These investments were governed by letters of agreement between Schnorenberg and each investor and, later, promissory notes. Pursuant to these agreements and promissory notes, investors generally provided Schnorenberg funding with the understanding the investors would receive twelve percent interest to be paid annually. The notes were collateralized by equity in KJS Marketing or one of the related companies. Thus, in the event Schnorenberg failed to pay the investors within the specified timeframe, the agreements allowed the investors to acquire ownership interests in Schnorenberg’s companies. The agreements, also generally required Schnorenberg to provide investors with financial statements for the companies.

¶ 3 In soliciting these investments, Schnorenberg did not disclose certain information to investors. He did not tell them that the Colorado Division of Securities had sued him and that he had been permanently enjoined from selling securities in Colorado. Nor did he tell investors that he had obtained a discharge from bankruptcy in 2003. Schnorenberg also withheld information from the investors who entered into agreements after he failed to pay the initial investors the interest they were owed under their respective agreements. He did not disclose to the later investors that he had failed to pay the initial investors; his companies had carried large debt loads; civil judgments had been entered against him for unpaid debts, and he had not satisfied such judgments; some of his companies had failed; and he had failed to provide his prior investors with financial statements for his companies.

¶ 4 Based on this conduct, Schnorenberg was charged, as relevant here, with twenty-seven counts of securities fraud premised on material misstatements or omissions, see § 11-51-501(1)(b), C.R.S. 2023, and one count of securities fraud premised on a fraudulent course of business, see § 11-51-501(1)(c).

¶ 5 He pursued two theories of defense at trial. First, he claimed that the agreements governing the investments were not securities under the Colorado Securities Act (the Act). §§ 11-51-101 to -803, C.R.S. 2023. Second, he arġued that, because he acted in good faith and in reliance on the advice of his securities lawyer, he lacked the requisite mens rea to be convicted of securities fraud. The jury nonetheless convicted Schnorenberg of all twenty-eight counts.

¶ 6 On appeal, Schnorenberg argues that the trial, court erred in six ways. We agree with the following three contentions of error: (1) the trial court erred by preventing Schnorenberg from testifying about the advice he received from his lawyer regarding what disclosures he needed to make to prospective investors; (2) the trial court further erred by declining to instruct the jury that good faith reliance on his lawyer’s advice was relevant to show that he lacked the requisite intent to commit the charged offenses; and (3) his convictions for seven material misstatement or omission counts were brought outside the statute of limitations and, as a result, must be vacated. Accordingly, as discussed below, we vacate his convictions on the seven time-barred counts, we reverse his convictions on the remaining twenty-one counts, and we remand the case for further proceedings.

¶ 7 In light of our disposition, we need not address Schnorenberg’s contentions that the trial court abused its discretion by denying his requests for a continuance and that reversal is required under the doctrine of cumulative error. However, we address his contention that the trial court erred by admitting expert testimony from the Colorado Securities Commissioner only to direct the trial court to consider two recent supreme court decisions on remand.

II. The Advice of Counsel Defense

¶ 8 Schnorenberg argues that the trial court erred by excluding his testimony about the legal advice his securities lawyer gave him in connection with his insurance business, and relatedly, that the trial court erred by refusing to instruct the jury that good faith reliance on advice of counsel is relevant to whether he had the requisite mental state to support a securities fraud conviction. We agree.

¶ 9 Both of these assertions of error relate to the advice of counsel defense to securities fraud charges. Because there is limited Colorado case law on this subject, we explain below how an advice of counsel defense is relevant to charges of securities fraud.

A. Standard of Review

[1, 2] ¶ 10 We review a trial court’s evidentiary decisions for an abuse of discretion, but whether a given statement constitutes hearsay is a legal question we review de novo. People v. Hamilton, 2019 COA 101, ¶ 12, 452 P.3d 184, 191. When the improper exclusion of nonhearsay evidence affects a defendant’s fundamental right to present exculpatory evidence, it is an error of constitutional dimension, and reversal is required unless we are persuaded beyond a reasonable doubt that it did not contribute to the defendant’s conviction. People v. Hoover, 165 P.3d 784, 790 (Colo. App. 2006) (citing People v. Scearce, 87 P.3d 228, 234 (Colo. App. 2003)).

[3–5] ¶ 11 "We review the jury instructions de novo to determine whether they correctly informed the jury of the law." People v. Sanders, 2022 COA 47, ¶ 34, 515 P.3d 167, 176 (cert. granted Apr. 24, 2023). "As long as we are satisfied that the jury was adequately instructed on the law, we review the trial court’s decision to give or decline to give a particular instruction for an abuse of discretion." Id (citing People v. Roberts-Bicking, 2021 COA 12, ¶ 17, 490 P.3d 1128, 1133). If we conclude the trial court erred by refusing to give an instruction, we must reverse unless the error was harmless. See McDonald v. People, 2021 CO 64, ¶ 55, 494 P.3d 1123, 1133.

B. Additional Facts

¶ 12 At trial, Schnorenberg testified that he had worked with the same securities attorney since 1990 and that he had consulted this lawyer for legal advice on how to raise funds for his insurance business. The securities lawyer could not testify at Schnorenberg’s trial because he was out of the country at the time. The trial court denied Schnorenberg’s motion to continue the trial so that the securities lawyer could testify.

¶ 13 Although the securities lawyer could not attend the trial, Schnorenberg sought to testify about the advice the lawyer had given him regarding his insurance business. On the first day of Schnorenberg’s trial testimony, he said that he had consulted with his securities lawyer about whether he could legally raise money and whether he needed to disclose to investors that he had been enjoined from selling securities in Colorado and had previously received a discharge from bankruptcy. His defense attorney then asked, "Based on those conversations with your lawyer [and] without telling me about the conversations, did you believe you were required to make those disclosures?" The prosecutor objected to this question, arguing that it called for a hearsay response. Schnorenberg, through his defense attorney, argued that his response did not call for hearsay because any out-of-court statement the question elicited would be offered for its effect on the listener. The trial court sustained the objection on the basis that the question called for hearsay.

¶ 14 During a subsequent recess, Schnorenberg’s counsel revisited the issue with the court, again arguing that, to the extent the question called for an out-of-court statement, the statement would be offered for its effect on Schnorenberg’s state of mind, not for the truth of the matter asserted, and that the statement was therefore not hearsay. He further contended that this testimony would be relevant because it could negate the mental state element of all twenty-eight counts of securities fraud.

¶ 15 The trial court, however, maintained its ruling that the question impermissibly called for a hearsay response. The trial court subsequently clarified that it recognized that an out-of-court statement offered solely for its effect on the listener is not hearsay, and that in this case, "the argument can be made" that the contemplated testimony fit under that "exception." It nonetheless found that Schnorenberg’s testimony was offered for its truth, and, accordingly, that the testimony should be excluded as hearsay. The trial court also declined to give Schnorenberg’s tendered limiting instruction that would have informed the jury to consider the testimony only for this purpose, expressing concern that Schnorenberg’s proffered testimony would not be reliable in the absence of his lawyer’s testimony.

¶ 16 In response to questions from his defense attorneys, Schnorenberg attempted twice more to testify about the advice his securities lawyer had given him regarding his...