Aug. 25 (Bloomberg) -- WorldCom Inc. plans to scrap stock- option grants for employees to reduce the potential for conflicts of interest after it emerges from the largest U.S. bankruptcy case, people familiar with the matter said.

The Ashburn, Virginia-based company will replace options with shares as a form of pay as part of a series of measures court- appointed monitor Richard Breeden will announce as early as today, the people said. The U.S. Securities and Exchange Commission is toughening rules governing options pay after some investors said they encouraged executives to overstate results.

WorldCom, which is being renamed MCI, wants to rebuild an image tarnished by an $11 billion accounting fraud as it prepares to exit bankruptcy. AT&T Corp. and other competitors have accused WorldCom of improperly avoiding the payment of network-access fees. WorldCom has been suspended from winning new contracts from the U.S. government, its top customer.

``It's critical to try to rebuild trust with investors and customers,'' said Pat Comack, a telecommunications analyst at Miami-based investment bank Guzman & Co. The reforms also may include a split of the chairman and chief executive officer roles currently held by Michael Capellas, Comack said.

Shares of WorldCom, the second-biggest U.S. long-distance telephone company, are worthless after the company lost about $200 billion in value. WorldCom aims to complete its reorganization by October.

Judge Jed Rakoff of the U.S. District Court in Manhattan asked Breeden to oversee WorldCom in July 2002, the month the company sought creditor protection. Breeden was chairman of the SEC from 1989 to 1993.

Close Collaboration

The SEC in November ordered Breeden to review the company's governance as part of a settlement of a suit against WorldCom that was completed this month and includes a $750 million penalty, the largest for an accounting-fraud case.

WorldCom will likely implement the measures in Breeden's report, Director Dennis Beresford said in an interview Tuesday. It can appeal any reforms it doesn't like to the court, he said.

``During the past year, we have worked in close collaboration with the corporate monitor to create an MCI that can stand as a role model of good corporate governance,'' said company spokeswoman Claire Hassett.

Breeden, who runs a consulting company in Connecticut that bears his name, didn't return a call seeking comment.

WorldCom's entire board resigned after the accounting scandal became public in June of last year. Some of the positions have been filled, and WorldCom has until the end of the week to meet a court deadline for completing its board.

WorldCom's restructuring calls for the company to be owned by creditors who were owed $41 billion at the time of the bankruptcy filing. Debt will fall to $5 billion.

Wrongdoing

Competitors including Verizon Communications Inc. have complained that the reorganization rewards WorldCom for misbehavior. Some telecommunications investors say the reduction in debt and other costs as part of WorldCom's reorganization will enable the company to reignite a price war that has already caused long-distance sales to tumble.

Reports on WorldCom's collapse released in June by its board and Bankruptcy Examiner Richard Thornburgh depict former CEO Bernard Ebbers as a domineering force. He made acquisitions, issued record amounts of debt and took out millions in loans from the company without challenge from the board, the reports said.

Ebbers and Chief Financial Officer Scott Sullivan were ousted in the months leading up to the bankruptcy filing. Sullivan has been charged with criminal-securities fraud related to the company's accounting and pleaded not guilty. Ebbers hasn't been charged with a crime.

$800 Per Hour

Capellas was brought in from Hewlett-Packard Co. in December to replace interim CEO John Sidgmore. Capellas was awarded a $50 million, three-year pay package that month after Rakoff and Breeden criticized a bigger one. Capellas also was required to sign a pledge that WorldCom would cooperate fully with investigations and prevent violations of the law.

Breeden, whose office is two doors down from Capellas's, bills WorldCom $800 per hour, a person familiar with the matter said. Earlier this year as legal bills for WorldCom's reorganization topped $50 million, Breeden directed lawyers working on the case to submit budgets for approval, said the person, who asked to remain anonymous.

Many U.S. companies are overhauling their boards and other practices after Congress last year passed the Sarbanes-Oxley law, which mandates governance improvements. Scandals at Enron Corp., Adelphia Communications Corp. and WorldCom led to passage of the law.

Stock Options

Microsoft Corp., the world's biggest software company, in July said it would stop paying employees and executives in stock options and use shares instead. Stock options give holders the right to buy shares at a preset price.

WorldCom's effort to emerge from bankruptcy may be hurt by allegations surfacing last month that the company illegally avoided paying network fees to local-phone companies. The call- routing allegations against WorldCom come from former employee James Krutchen and competitors such as AT&T and Verizon.

They accuse WorldCom of engaging in an elaborate plot to disguise long-distance calls as local connections and avoid paying fees to terminate them. WorldCom's official creditor committee on Thursday denied the allegations and asked the bankruptcy court to order the company's competitors to turn over documents that could disprove them.

Last Updated: August 25, 2003 00:13 EDT