A Midwestern insurance agent, who doesn't want his name used, claims he was scammed into selling fake "promissory notes." You need to hear what he says, in case you're advised to make a similar investment by someone you trust.

He had a client who wanted a safe short-term investment, for around $1 million. (Don't let the big number put you off; these notes are sold to small investors, too.)

He said he called the marketing company from which he got annuities. The marketer had an idea: a nine-month promissory note from a Florida company called Lifeblood Biomedical.

Lifeblood, a new company, borrowed money from individual investors. The investor was supposed to earn 12 percent, at a time when one-year bank CDs were paying 4.5 percent. The agent wouldn't disclose his commission.

The Florida company said it was working on a technology for storing and regenerating "cord blood" (blood from umbilical cords, after birth), which could be used to treat disease. "I thought, 'Oh, boy, this is leading-edge,' " the agent said.

He thinks he did "every shred of due diligence that could be done." He read the marketing materials, complete with doctors' endorsements. He flew to Florida to meet with company executives. He visited the lab in Atlanta and talked with the technician in charge. He said he was so excited that he invested $100,000 of his own.

To ensure repayment, the company provided a bond from Threshold Insurance Services in Panama City, Panama. "That worried me a little bit, because it was out of the country," the agent said. "But we're trading mutual funds globally now, so the bond made sense."

That was last spring. In November, Florida officials shut down Lifeblood. Threshold didn't cover the bond. Lifeblood's owners may face federal criminal charges for securities fraud, mail fraud and wire fraud, according to Laura Royal, the investigator for criminal enforcement in the state comptroller's office in Tampa. Lifeblood's attorneys didn't return calls.

Investors put about $8 million into the notes. Florida has recovered some of the money and hopes to repay around 30 cents on the dollar.

What did the agent do wrong?

He checked only with the people who were running the scam.

He didn't wonder why a risky start-up company could get an insurer to guarantee such a huge sum of money. Start-ups don't have the cash to repay in such a short period of time.

He decided, based on no evidence, not to worry about the offshore insurance company. Had he called Florida's insurance department, he'd have learned that Threshold wasn't authorized to do business there.

He didn't find it strange that a "guaranteed" investment would pay so much more than market interest rates. His client also had blinders on.

He didn't check with his own state securities office to see if the notes were registered.

Some states don't require certain short-term securities to be registered. But the agent should have found out what the exemptions were, and whether Lifeblood's notes qualified.

Royal is heading a 25-state task force to try to reduce the sales of worthless promissory notes. State regulators believe that about 1,000 insurance agents and other financial advisers are involved, coast to coast. The agents generally work for (or own) small, independent agencies.

The states are investigating about 30 companies that have issued notes. The companies generally target older investors who want a higher return on their savings at no risk. But younger investors also are entrapped.

Some of the salespeople have apparently been misled themselves, or persuaded by the high commissions (up to 8 percent) to ignore common sense.

But other agents know exactly what they're doing. They advertise on the Internet, or in well-known newspapers, promising "10 percent to 15 percent interest, guaranteed principal, no fees, suitable for 401(k)s and IRAs." They persuade clients to cash in their life insurance or annuities.

Several states have brought charges. Indiana filed a criminal indictment in July against three agents and advisers, one of whom was a former monk, said Bradley Skolnik, state securities commissioner.

Maine recently jailed nine people who stole $8 million from more than 100 people. They were selling fraudulent notes in a real estate development company and the expected proceeds from a lawsuit. Investors were told their money would remain in escrow.

In November, North Carolina shut down a company called South Mountain Resort.

The Securities and Exchange Commission is also bringing cases against fraudulent promissory notes.

There's a simple way to avoid these losses: Give up the dream of earning high interest risk-free.