Welcome to the forum Keith..!
Here is the section they gigged you on;
"1910.254(d)(9)(iii)
Cables with damaged insulation or exposed bare conductors shall be replaced. Joining lengths of work and electrode cables shall be done by the use of connecting means specifically intended for the purpose. The connecting means shall have insulation adequate for the service conditions."
http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=STANDARDS&p_id=9855 The "work clamp" (not a ground) should be attached to the work, and in essence becomes a part of it.
Uninsulated sections of work lead can come into contact with just about anything and cause a short.. Cables are flexable and move around quite a bit... The work cable will carry every bit of power/current that the stinger/electrode lead carries.
Not trying to be flip or disrespectful,,, But what exactly are you trying to defend? Seems like an issue that could have been repaired on the spot without the hassle of a citation... But I don't see any argument that you could present to prove that with damaged work leads that you were still in compliance either.