Deutsche Bank and JP Morgan Chase are preparing to sue Dermot Desmond's IIU Strategies over the sacking of its leading hedge fund manager. The banks both have investments in the fund managed by Mr David Morrison, who was sacked by Mr Desmond following an incident involving a female member of staff at the exclusive Sandy Lane Hotel in Barbados, which is part-owned by the Irish entrepreneur.

Investors put a total of $175 million (€184.4 million) into an IIU currencies and bond fund last year on the back of Mr Morrison's record at Tiger Management, the hedge fund run by Mr Julian Robertson.

Mr Desmond, whose other interests include stakes in London City Airport and Celtic, the Glasgow football club, sacked Mr Morrison after he delayed disclosing to the IIU board the Sandy Lane incident. Many investors in Mr Morrison's fund immediately demanded return of their stakes, but the IIU Strategies board decided, on legal advice, that it had to enforce a 10 per cent early withdrawal penalty.

Deutsche Bank and JP Morgan are challenging the decision to impose the penalty on the basis of their individual contracts with IIU, which they say contain a "key-man clause". This allows investors to get out with no penalty in the event that the manager leaves the fund.

Deutsche is understood to be suing to enforce the key-man clause, while JP Morgan is also set to take legal action. JP Morgan's preparations have been complicated by the fact that both it and IIU lost their copies of the final agreement. The bank is now using earlier versions of the contract to build its case. One of these is understood to include provision for JP Morgan employees to make use of Mr Morrison's extensive collection of Ferraris when visiting London. JP Morgan took a stake of around $40 million in Mr Morrison's fund, while Deutsche invested through a derivative on behalf of Mr Leonard Stern, a New York real-estate mogul. Deutsche Bank and JP Morgan declined to comment. Mr Desmond did not return a call and Mr Morrison did not respond to messages.