UPDATE: I can generate the same error just by adding the medium trust configuration line to the Telerik demo site's web.config. Go to the Tooltip demos and under the Functionality group click on the 'RadTooltip vs RadTooltipManager' demo.
I don't have an OnAjaxUpdate event handler. The ToolTipManager is just being used to auto-handle all tooltips so it can display html-formatted tooltips. Below is the markup. I also tried removing the AutoTooltipify and assigning a few test targets, but got the same error.
I set medium trust on my IIS test site in the site properties. For the Visual Studio 2010 development web server I just have the standard line in web.config: <trust level="Medium" />. In both IIS and the Cassini server running in full trust works but medium trust does not. My client's web host provider does not offer full trust, so this makes the tooltip manager unusable for this application.