(Bloomberg) – A Morgan Stanley employee identifying himself as a credit audit specialist sued the bank over claims he suffered retaliation after he discussed the growing number of high-risk loans in its portfolio.

Saeed Ahmad alleged he was demoted after he conducted audits and told superiors about the risks the bank was taking and what he saw as a lack of adequate controls, according to a suit filed yesterday in federal court in Manhattan.

Until November 2004, most of Morgan Stanley’s corporate loan portfolio consisted of lines of credit provided to “highly credit-worthy companies” with AAA to A ratings, Ahmad said in the complaint. After that, the firm began lending to companies with the non-investment grade ratings of BB+ to B range, he said.

“Ahmad is a whistle-blower who, out of loyalty to his employer, Morgan Stanley, his duty toward shareholders and out of professional obligation, attempted to point out to his superiors and others at the bank the risks the bank was taking,” he said in the complaint.

Ahmad said he went on leave and returned to find he had been demoted within the firm’s audit department. He later reported his concerns to the U.S. Securities and Exchange Commission as well as the Federal Deposit Insurance Corp., according to the complaint.

‘Exhaustive Review’

“Morgan Stanley conducted an exhaustive review of Mr. Ahmad’s claims over three years ago which involved both internal and external counsel and we concluded that his concerns were completely unfounded,” Mark Lake, a Morgan Stanley spokesman, said in a phone interview. “Morgan Stanley did not engage in any wrongdoing or misconduct with respect to any of the matters raised by Mr. Ahmad.”

As a result of the alleged retaliation, Ahmad said he suffers from depression, stress, diabetes and panic attacks. While still an employee of the firm, Ahmad said he’s now on long-term disability leave.

The suit, which includes a claim of retaliation against whistle-blowers, seeks reinstatement of his prior position, back pay as well as unspecified lawyers’ fees.

John Balestriere, a lawyer for Ahmad, didn’t return voice- mail and e-mail messages yesterday seeking comment on the case. The case is Saeed Ahmad v. Morgan Stanley, 13-CV-06394, U.S. District Court, Southern District of New York (Manhattan).

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