DIRECTORS OVERSEEING Dermot Desmond's $175 million (€116 million) hedge fund quit because a group of "insiders" refused to obey instructions to shut it down after its investment manager was sacked for sexual misconduct, a lawyer representing billionaire Stanley Druckenmiller said in a Manhattan court yesterday.

Attorney David G Trachtenberg told a federal Court of Appeals hearing that he should have been allowed to question former directors of Desmond's Cayman Islands-based Macro Fund during disclosure proceedings in a lower court.

He also wanted to question others who "jumped ship" from the Macro Fund because they felt insiders were acting inappropriately.

Mr Druckenmiller is claiming fraud, breach of contract and breach of fiduciary duty.

He withdrew from the fund in 2002 after its star investment manager, David Morrison, was dismissed for alleged sexual misconduct toward a chambermaid in Mr Desmond's Sandy Lane hotel in Barbados.

In a sometimes tense exchange before the three-judge panel, Mr Trachtenberg said he was not given adequate disclosure of information in Mr Druckenmiller's unsuccessful case against Mr Desmond before a lower court.

"As this court well knows, discovery involves more than receiving documents that parties you don't trust give to you," he said.

Mr Trachtenberg was replying to repeated questions from Judge Reena Raggi, who asked how he knew that the fund had made a profit up to Mr Morrison's dismissal in February 2002, yet claimed inadequate disclosure of documents from the date of the firing until Mr Druckenmiller withdrew from the fund in June 2002.

After legal wrangling about the terms of the contract, Mr Trachtenberg said there was a bigger issue, namely that Mr Druckenmiller had invested in a particular type of fund and that there had been a breach of contract.

After Mr Morrison's departure, the Macro Fund managers stopped taking risks, stopped portfolio management and simply put the money into cash, Mr Trachtenberg alleged.

He also claimed that the Macro Fund misrepresented the investment, did not deliver what they promised, took inconsistent positions, disregarded their offer circular to investors and declared that the side letter setting out the investment terms was not legally binding.

Mr Desmond's lawyer, Marc Reiner, strongly rejected Mr Trachtenberg's claim that he should have been given greater access to Macro Fund documents and former employees.

He said Mr Trachtenberg was simply on a "fishing expedition" to uncover new information.

Mr Reiner described it as a "Hail Mary" request, and strongly rejected any wrongdoing on the part of the Macro Fund, pointing out his client's success in the lower court.

Presiding Judge Dennis Jacobs said the court will reserve judgment until a future date.