I assume that you are talking about the MOSS Asset Picker dialog for links. Unfortunately we do not have the source code for that - we simply call the dialog and then take whatever value it returns and insert it in the editor.
You might get more information about this issue on the MS newsgroups for MOSS 2007.
That being said, if the problem happens right after the user clicks the "Up" button for the first time, then the problem must be in the permissions for the parent site. What you can try is giving the user permissions for the Site Collection Documents library in the root site of the site collection, because there is a button on the link dialog that takes the user directly to that library.
the Telerik team