WorldCom Can Cancel Ad Deal, Judge Says

NEW YORK —  WorldCom Inc. can cancel an $81-million-a-year advertising agreement with AOL Time Warner Inc. as the second-biggest U.S. long-distance phone company cuts costs to help it emerge from bankruptcy, a federal judge ruled Tuesday.

The four-year contract required WorldCom, parent of MCI Group, to buy more ads than it needs and allocated ads among AOL Time Warner media properties “in a manner that is not favorable,” WorldCom said in court papers. The agreement, which would have run through 2004, is “unnecessary and costly,” Clinton, Miss.-based WorldCom said.

WorldCom’s abandonment of the deal comes after AOL, the world’s largest media company, has seen the value of its shares fall more than 66% this year amid declining ad sales at its Internet unit and slowing subscriber growth.

U.S. Bankruptcy Judge Arthur J. Gonzalez approved WorldCom’s request to back out of the deal and left open the question of how much WorldCom owes AOL under the contract.

Companies reorganizing in bankruptcy can abandon certain types of contracts, and any legal damage claims that arise as a result can be combined with other creditors’ claims.

AOL Time Warner, which also owns magazines and cable television networks such as CNN, was named in July to WorldCom’s 15-member official committee of unsecured creditors.

Robert Rosenberg, a lawyer for New York-based AOL Time Warner, and Tricia Primrose, a company spokeswoman, could not be reached for comment.

Shares of AOL Time Warner fell 53 cents to $10.67 Tuesday on the New York Stock Exchange. Shares of WorldCom fell less than 1 cent to 9 cents in over-the-counter trading.

Also on Tuesday, WorldCom won court approval to pay its employees and certain officers for some legal bills. The coverage includes suits involving property damage, personal injury and employment disputes, as well as company officers sued over negligence, securities or pension law violations.

WorldCom filed for bankruptcy protection in July, a month after revealing it hid $3.9 billion in costs to inflate sales. The company later uncovered a further $3.3 billion in hidden costs since 1999, bringing the total misreported to more than $7 billion. WorldCom says it owes creditors $41 billion.

WorldCom’s former accounting director, Buford Yates Jr., pleaded guilty Monday to aiding in the company’s alleged multibillion-dollar fraud. He said he was following orders from supervisors, including former Chief Financial Officer Scott D. Sullivan, to falsify financial records.

Sullivan was indicted Aug. 28 on charges that he orchestrated the alleged fraud.

AOL’s America Online unit and WorldCom both are under federal investigation of their accounting.

AOL Time Warner is completing an internal investigation of America Online advertising deals after disclosing in August that it may have improperly booked $49 million in ad revenue. WorldCom was one of three companies that accounted for the $49 million.