Knowing Materiality: Colorado Supreme Court Holds “Willfully” Applies to Every Element of CSA § 11‑51‑501(1)(b) and (c), Making Advice‑of‑Counsel Evidence Relevant to Mens Rea

Knowing Materiality: Colorado Supreme Court Holds “Willfully” Applies to Every Element of CSA § 11‑51‑501(1)(b) and (c), Making Advice‑of‑Counsel Evidence Relevant to Mens Rea

Introduction

In People v. Schnorenberg, 2025 CO 43 (Colo. June 23, 2025), the Colorado Supreme Court resolved a recurring question in state securities fraud prosecutions: to which elements of the offense does the statutory mens rea of “willfully” apply under the Colorado Securities Act (CSA), § 11‑51‑501(1)(b) and (c), C.R.S.? The Court held that “willfully”—synonymous in Colorado with “knowingly”—applies to every element of these offenses, including the materiality element in subsection (1)(b) and the “fraud or deceit” element in subsection (1)(c). This clarification directly affected the admissibility and significance of a defendant’s reliance on the advice of counsel, which the Court recognized as relevant evidence tending to negate willfulness.

The case arises from a criminal prosecution of Kelly James Schnorenberg, who, through KJS Marketing, Inc., raised more than $15 million from roughly 250 investors between 2009 and 2015. He was charged with securities fraud for making material misstatements or omissions and for engaging in a fraudulent course of business. Central to his trial strategy was testimony about advice he received from a securities attorney, which the district court excluded as hearsay and as irrelevant; the court also refused to give an advice-of-counsel related jury instruction. The court of appeals reversed. The Supreme Court affirmed the reversal and ordered a new trial on the relevant counts.

This commentary explains the decision, its doctrinal foundation, and its practical implications for prosecutions and defenses under the CSA.

Summary of the Opinion

The Colorado Supreme Court held:

  • Mens rea attaches to each element: The culpable mental state of “willfully” (i.e., “knowingly”) applies to every element of securities fraud under § 11‑51‑501(1)(b) and (c). For subsection (1)(b), the People must prove the defendant knew the statement or omission was material. For subsection (1)(c), the People must prove the defendant knew the act, practice, or course of business operated or would operate as a fraud or deceit.
  • Advice of counsel is relevant: Evidence that a defendant in good faith relied on counsel’s advice is relevant to whether the defendant acted willfully and should not be excluded as hearsay when offered to show its effect on the listener (the defendant) rather than for the truth of the advice.
  • CRE 403 does not bar such evidence on this record: The trial court’s exclusion was not justified by Rule 403 concerns; any risk of confusion or prejudice could have been mitigated with a limiting instruction and cross-examination. Moreover, by testifying to counsel’s advice, the defendant would waive the privilege, allowing meaningful probing by the prosecution.
  • Not harmless: Excluding the advice-of-counsel testimony was not harmless error, even under the nonconstitutional standard, because the evidence went to the heart of willfulness.
  • Jury instructions: The elemental instructions given (tracking the statute and the definition of “willfully”) were correct and sufficient. Whether to add a separate advice-of-counsel instruction is within the trial court’s discretion; courts may not instruct that good faith is an absolute defense, nor may they instruct that good faith is not a defense at all.

Disposition: The Court affirmed the court of appeals and remanded for a new trial on the non-time-barred counts.

Factual and Procedural Background

Schnorenberg formed KJS Marketing, Inc. in 2008 to secure funding and recruit agents for insurance companies. From 2009 to 2015, KJS solicited over $15 million from about 250 investors, typically via agreements promising 12% annual interest. In making these solicitations, he did not disclose a number of adverse facts, including a prior permanent injunction barring him from selling securities in Colorado, a bankruptcy filed five years earlier, substantial unpaid judgments, failed companies, large debt loads, and failure to repay prior investors or provide promised financial statements.

The People charged him with 25 counts of securities fraud under § 11‑51‑501: 24 counts under subsection (1)(b) (material misstatements/omissions) and one under subsection (1)(c) (fraudulent course of business). He intended to present a “good faith reliance on advice of counsel” defense, centering on advice from a securities lawyer. Because that lawyer was out of the country during trial, the defense sought a continuance, which the court denied; the court again denied a continuance on the first day of trial. The court then sustained the People’s hearsay objection when the defense sought the defendant’s testimony about the specific advice given and declined a limiting instruction explaining the nonhearsay purpose. The court also refused to instruct that the jury could consider good faith reliance on counsel in assessing willfulness. He was convicted on all tried counts.

On appeal, the court of appeals vacated seven counts as time-barred, reversed the remaining convictions, and remanded, concluding the advice-of-counsel testimony was relevant, not hearsay, and not excludable under CRE 403. It also concluded that refusing the defense-tendered instruction was error. The People obtained certiorari. The Supreme Court affirmed the reversal based principally on the evidentiary error and clarified critical aspects of mens rea and instructions under the CSA.

Analysis

Precedents and Authorities Cited and Their Influence

  • Statutory anchoring of mens rea to all elements: Section 18‑1‑503(4), C.R.S. provides that when an offense includes a specified culpable mental state, that mental state applies to every element unless the statute clearly indicates otherwise. The Court found no clear intent to limit mens rea in § 11‑51‑501(1)(b) or (c). This provision is the fulcrum of the Court’s holding that willfulness extends to materiality and to fraud/deceit.
  • Definition of “willfully”: Section 18‑1‑501(6), C.R.S. equates “willfully” with “knowingly” and defines knowledge in terms of awareness of the nature of conduct or the existence of a circumstance. The Court reaffirmed this equivalence, aligning with People v. Riley (1985).
  • People v. Riley, 708 P.2d 1359 (Colo. 1985): Riley held that “good faith is not a defense” instructions risk convicting defendants who believed their statements were true or their conduct not fraudulent. Riley thus supports admitting good faith evidence and requiring the prosecution to prove awareness of falsity/materiality and fraud/deceit.
  • People v. Blair, 579 P.2d 1133 (Colo. 1978): Blair rejected “specific intent” as an element of securities fraud but emphasized using “willfully/knowingly” rather than “specific intent.” The Court clarified that Blair does not limit willfulness to the act alone (e.g., making a statement) and does not foreclose good faith evidence; it merely rejected making good faith an absolute defense.
  • People v. Hoover, 165 P.3d 784 (Colo. App. 2006) and People v. Terranova, 563 P.2d 363 (Colo. App. 1976): Both appellate decisions recognize advice-of-counsel evidence as relevant to the fraudulent practices charge and to mens rea; the Supreme Court’s holding harmonizes with these lines of cases.
  • Goss v. Clutch Exchange, Inc., 701 P.2d 33 (Colo. 1985): Provides the materiality standard—whether there is a substantial likelihood a reasonable investor would consider the matter important. The Court used this to explain why knowledge of materiality matters for mens rea.
  • Coordination with federal law: The CSA directs coordination with federal analogues. Section 11‑51‑501(1) parallels SEC Rule 10b‑5 (17 C.F.R. § 240.10b‑5). Federal cases (e.g., United States v. Bush, D.C. Cir. Howard v. SEC, Fifth Cir. United States v. Peterson, and Fifth Cir. SEC v. Snyder) treat advice-of-counsel as evidence negating intent/knowledge to defraud. The Court drew on these as “highly persuasive” given the textual parallels.
  • Rules of Evidence:
    • CRE 401 (relevance) and CRE 403 (balancing) were central. The Court held the advice-of-counsel testimony was plainly relevant to willfulness and that 403 concerns did not substantially outweigh probative value, given the availability of limiting instructions and cross-examination.
    • Hearsay: The prosecution conceded and the Court agreed that statements offered for their effect on the listener are not hearsay. The district court’s hearsay ruling was error.
    • Privilege: People v. Trujillo holds that injecting advice-of-counsel waives attorney-client privilege as to that subject, mitigating “sword-and-shield” concerns.
  • Jury Instructions: People v. Rodriguez confirms that when a mens rea is offset in an elemental instruction, it modifies all succeeding elements. Day v. Johnson and People v. Weinreich stress that instructions must correctly state the law and generally track statutory language. Riley and Blair together forbid instructing juries that good faith is either an absolute defense or categorically not a defense; beyond that, an additional advice-of-counsel instruction is discretionary.
  • Harmless error: Under People v. Monroe (nonconstitutional error) and Hagos v. People (constitutional error), the Court found reversible error even assuming the less demanding, nonconstitutional standard because the excluded testimony likely contributed to the convictions.

Legal Reasoning

The opinion turns on a straightforward but pivotal application of Colorado’s default mens rea rule. Section 18‑1‑503(4) presumes the specified mental state applies to “every element” unless the legislature clearly indicates otherwise. Nothing in § 11‑51‑501(1)(b) or (c) displays an intent to limit the scope of “willfully,” and the CSA’s separate penalty provision (§ 11‑51‑603(1)) requires willfulness for criminal liability. Coupled with § 18‑1‑501(6), the Court held that the prosecution must show the defendant knew the materiality of a misstatement/omission (for (1)(b)) and knew that their act/practice/course of business would operate as a fraud or deceit (for (1)(c)).

This construction reshaped the relevance of advice-of-counsel evidence. Because knowledge of materiality and knowledge of fraud/deceit are now expressly elements the People must prove, testimony that the defendant sought and relied on a securities lawyer’s advice about whether particular facts were material or whether a course of conduct was fraudulent is probative of the defendant’s state of mind. Offered to explain the defendant’s beliefs and awareness, such testimony is not hearsay (it is introduced for its effect on the listener). Moreover, CRE 403 does not justify exclusion here: any risks (jury confusion, counsel’s unavailability for cross) can be substantially mitigated through limiting instructions and cross-examining the defendant; and any privilege concerns are resolved by waiver once the defendant testifies about the advice.

The Court also rejected two doctrinal objections. First, it clarified that this approach does not create a “mistake of law” defense: the issue is not whether the defendant believed his conduct was lawful but whether he knew the omitted facts were material or that his conduct would operate as fraud or deceit. Second, it explained that differences between the federal “scienter” label and Colorado’s “willfully/knowingly” are immaterial here because the state-law holding rests on § 18‑1‑503(4)’s scope-of-mens-rea rule.

On harmless error, the advice-of-counsel testimony went to the core of the only disputed dimension after this construction—willfulness—making it reasonably probable that its exclusion contributed to the verdicts.

On jury instructions, the Court approved the trial court’s elemental instructions, which tracked the statute and properly placed “willfully” so as to modify all subsequent elements (per Rodriguez). As to a separate, explicit advice-of-counsel instruction, the Court held that Colorado law neither requires nor forbids it; providing such an instruction is within the trial court’s discretion, with the caveat that courts may not instruct that good faith is categorically a defense or categorically not a defense.

Impact and Practical Implications

The decision has immediate and significant consequences for criminal securities prosecutions in Colorado.

  • Heightened proof on mental state: Prosecutors must now prove beyond a reasonable doubt that defendants:
    • knew that any misstatement or omission was material (subsection (1)(b)), and
    • knew that their act/practice/course of business would operate as a fraud or deceit (subsection (1)(c)).
    This goes beyond proving the objective materiality or the objective fraudulent character of conduct; it demands evidence of the defendant’s subjective awareness of those features.
  • Advice-of-counsel will feature prominently: Expect more defendants to present detailed evidence of consultations with securities counsel. Trial courts should anticipate and plan for:
    • Privilege waiver and the scope of permitted cross-examination;
    • Appropriate limiting instructions (e.g., “admitted to show effect on the listener, not the truth of the advice”);
    • Scheduling realities where the attorney-witness’s presence matters (continuances may be more justifiable when counsel’s testimony is central).
  • Discovery and pretrial litigation: Because reliance opens the door to privileged communications, litigants should expect discovery fights over the scope of waiver, production of correspondence, and possible in camera reviews to calibrate fairness without overbreadth.
  • Jury instructions:
    • Elemental instructions should track the statute, define “willfully/knowingly” per § 18‑1‑501(6), and place the mens rea in a way that clearly modifies all elements.
    • Whether to give a separate advice-of-counsel instruction is discretionary. A neutral formulation that “the jury may consider evidence of good-faith reliance on advice of counsel in deciding whether the prosecution has proven that the defendant acted willfully with respect to any element of the offense” would be consistent with Schnorenberg, Riley, and Blair.
    • Courts must not tell juries that good faith is either an absolute defense or not a defense at all.
  • Charging and proof strategies:
    • Prosecution: Develop state-of-mind evidence beyond the “what” of the statements—e.g., emails discussing risk of investor impact, compliance trainings, warnings from regulators or counsel, internal memos about investor significance—in order to prove knowledge of materiality/fraud.
    • Defense: Lay a robust foundation for reliance (who, when, what facts were disclosed to counsel, what advice was given, how the defendant acted in response) to maximize probative value and minimize 403 concerns.
  • Alignment with federal law: The ruling harmonizes Colorado practice with federal Rule 10b‑5 jurisprudence, which treats advice-of-counsel as relevant to scienter. This should encourage courts to draw on federal guidance for evidentiary management and jury instructions while honoring Colorado’s statutory framework.
  • No mistake-of-law defense: The Court guarded against expanding defenses; the ruling concerns proof of knowledge of facts (materiality; fraudulent operation), not knowledge of legality.

Complex Concepts Simplified

  • “Willfully” vs. “Knowingly”: In Colorado criminal law, “willfully” means the same as “knowingly.” A person acts knowingly if they are aware of the nature of their conduct or that a circumstance exists. It does not require purpose to break the law.
  • Materiality: A fact is “material” if a reasonable investor would consider it important in deciding whether to invest. Knowledge of materiality means the defendant was aware that the fact would matter to investors, not simply that the fact existed.
  • Fraud or deceit (operation as fraud): For subsection (1)(c), the prosecution must show the defendant knew the course of business operated—or would operate—as a fraud or deceit upon any person. The focus is on awareness of the effect of the conduct, not just its outward form.
  • Advice-of-counsel evidence: Not an affirmative defense that automatically acquits, but evidence suggesting the defendant did not act knowingly. Offered to explain the defendant’s state of mind, it is typically admissible as nonhearsay (effect on the listener). Introducing it waives privilege on that subject matter.
  • Hearsay vs. nonhearsay: A statement is hearsay if offered to prove the truth of what it asserts. It is not hearsay if offered to show its effect on the listener (e.g., to demonstrate what the defendant believed or why the defendant acted).
  • CRE 403 balancing: Even relevant evidence can be excluded if its probative value is substantially outweighed by dangers like unfair prejudice or confusion. Courts give relevant evidence its maximum probative value and minimum prejudicial effect. Limiting instructions and cross-examination are key tools to manage any risks.
  • Harmless error: Not every error requires reversal. A preserved nonconstitutional error requires reversal if there is a reasonable probability it contributed to the conviction. Excluding central, exculpatory state-of-mind evidence commonly meets that standard.

Practice Pointers Post‑Schnorenberg

  • For prosecutors:
    • Charge and try cases with explicit attention to proving knowledge of materiality and knowledge that conduct operated as fraud/deceit. Prepare state-of-mind evidence.
    • When facing advice-of-counsel claims, pursue targeted discovery once waiver occurs; be ready to cross on the completeness of disclosures to counsel and the reasonableness of reliance.
    • Request a limiting instruction clarifying the nonhearsay purpose of any advice-of-counsel testimony.
  • For defendants:
    • Lay foundation: identify the attorney, the timing of the consultation, the facts disclosed, the specific advice received, and how you relied on it.
    • Anticipate and manage privilege waiver; be prepared for cross and production of related documents.
    • Consider requesting a neutral instruction allowing the jury to consider reliance evidence when assessing willfulness.
  • For trial judges:
    • Admit advice-of-counsel testimony when offered for its effect on the listener; give a limiting instruction upon request.
    • Use CRE 403 sparingly in this context; prefer mitigation tools (limiting instructions, cross, targeted continuances) over exclusion.
    • Ensure elemental instructions track the statute and position “willfully/knowingly” so it clearly modifies all relevant elements; consider, but do not feel compelled to give, a separate advice-of-counsel instruction.
    • Avoid instructions declaring good faith either an absolute defense or no defense at all.

Unresolved or Open Questions

  • Foundational requirements: While the Court endorsed admissibility, it did not articulate a formal foundation test (e.g., full disclosure to counsel, competence of counsel, and good-faith adherence to advice). Trial courts may develop these parameters case by case.
  • Scope of waiver: The precise contours of subject-matter waiver in advice-of-counsel claims can be contentious; future cases may refine how far into related communications the waiver reaches.
  • Recklessness: Federal securities law sometimes allows recklessness as scienter. Schnorenberg did not engage that question under Colorado’s “willfully/knowingly” standard, which now governs criminal CSA prosecutions.

Conclusion

People v. Schnorenberg is a significant recalibration of Colorado criminal securities law. By holding that “willfully” applies to every element of § 11‑51‑501(1)(b) and (c), the Court requires prosecutors to prove a defendant’s knowledge both of materiality and of the fraudulent or deceitful operation of their conduct. This, in turn, makes evidence of good-faith reliance on the advice of counsel squarely relevant and generally admissible, subject to routine evidentiary safeguards like limiting instructions and the resulting privilege waiver.

The Court affirmed the reversal of Schnorenberg’s convictions because the exclusion of his advice-of-counsel testimony was not harmless. At the same time, it clarified that while elemental instructions must track the statute and ensure willfulness modifies all elements, a separate advice-of-counsel instruction is discretionary; courts may neither elevate good faith to an absolute defense nor erase it from the jury’s consideration.

Going forward, Schnorenberg will shape charging decisions, trial strategies, and evidentiary rulings across Colorado securities prosecutions, aligning state practice more closely with federal approaches and placing the defendant’s state of mind—especially knowledge of materiality and fraudulent operation—at the center of the case.

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