Floyd E. Kanoed of Lynchburg, Va., says he never doubted he could grow worms. So when he saw a newspaper advertisement last year that said there was money to be made in earthworms, Kanode invested nearly $4,000 in a worm franchise and worm-growing equipment.

After more than 16 months work Kanode has managed to sell only $210 worth of worms. He had expected to make $12,000 in his first year.

This week the company that allegedly lured Kanode into worms, Natiional Worm Growers Exchange Inc., of Smyrna, Tenn., was fined a record $380,000 by the Virginia State Corporation Commission, on charges of violating Virginia securities laws. The promise of certain, big profits in worms, the Virginia agency held, constituted a fraudulent securities offering.

"When I got ready to produce worms, the company skipped town," Kanode said yesterday. "I was taken. I'm going to try to pull my worms through the winter and then I'm going to turn them loose."

Kanode is one of thousands of small investors across the United States who have been drawn into in what state and federal securities investigators agree is a "multimillion dollar" scandal, involving numerous wormpedding outfits.

"This is one of the smoothest scams I've ever seen," said Leonard H. Mays, chief securities examiner for the Alabama Securites Commission. "Investors are led to believe there are all kinds of markets for worm, but the markets just aren't there." Alabama has indicated eight worm promoters, including actor James Drury, who starred in the television show "The Virginina," on securities fraud violations, Mays said.

The federal Securities and Exchange Commission issued a warning last month to prospective worm investors. Securities commissions in at least 20 states, including Maryland, have attempted to clamp down on worm-breeding schemes, according to Robert Daveport, an SEC regional administrator for the Denver area.

"There is a significiant number of investors throughtout the United first year, $28,000 the second and unlimited amounts thereafter for about an hour of work daily, DePaolo said.

The worm companies generally States and a significant amount of money involved in this worm business," Davenport said yesterday.

According to Tennessee securities investigator Pat DePaolo, who has spent seven months chasing after worm companies, worm promoters go to the homes of people who have responded to their advertising, expound on the tremedous demand for worms and promist great wealth for little effort.

National Worm Growers Exchange, which has recently gone out of business, told its more thant 1,400 customers (who invested some $3 million) they could expect a $12,000 profit the promise to buy back all the worms the growers can produce, DePaolo said. "They say the worm demand is so great they can never catch up," he said.

The worm market, however, is extremely tight, according to Mays, who had spent six months of research for the Alabama Securities Commission trying to find where all those worms could go.

Markets for worms such as organic waste disposal, protein supplements for animal and human food, reforestation and organic gardening simply do not exist, contrary to some worm companies' claims, Mays said.

Even if the marketrs did exist, according to Dr. Roy Hartenstein, a leading worm expert and zoologist at the State University of New York College of Enviroment and Forestry, the promoters who sell the worm franchises do not know enough about worms to teach others how to grow them.

hartenstein said the reproductive capacities worms are extremely high, enalbing them to more than double their numbers every 60 days. "But these people selling the worms are salesman. They don't know anything about the biology of a worm. They are giving the worm business a bad name," the zoologist said.

There are established, legitimatge companies growing worms for sale as fish bait and for agricultural uses, Mays said.

State securities commissions became interested in the worm business because companies that promise to buy back investors' worms are, in effect, selling securities.

But in Virginia, at least, equipment sold with the worms secured neither the worm grower nor his worms.

According to the SCC, some of the electric devices sold with worm bins had faulty thermostats that kept the bins so hot the worms burned.