Problems at Allied Capital (NYSE: ALD) -- the target of short seller David Einhorn's book Fooling Some of the People All of the Time -- continued yesterday with the announcement that one of its portfolio companies, Ciena Capital LLC had filed for chapter 11 bankruptcy protection.

Ciena's predecessor company -- Business Loan Express -- is under fire from federal prosecutors who allege that the company participated in deals designed to defraud the United States government.

What's so interesting about this mess is that a) If you read Einhorn's book, he pointed out serious problems at Business Loan Express far before Ciena was admitting to them, and b) The SEC appears to have completely dropped the ball on this case, resulting in substantial losses to investors.

It's also interesting to note that Overstock (NASDAQ: OSTK) CEO Patrick Byrne's self-proclaimed investigative journalism site DeepCapture, which serves mainly to attack anyone who criticizes Byrne's company or his ideas, has been rallying to Allied's defense in recent months. One of the site's reporters, Mark Mitchell described (PDF) Allied, Overstock, and Novastar Financial as "victims" of a supposed conspiracy of hedge funds and corrupt reporters hell bent on destroying them.

With the Allied mess unfolding much as Einhorn predicted and Novastar on the brink of bankruptcy in the wake of numerous investigations and revelations of shoddy lending practices, it's bad news for Dr. Byrne if Overstock is to be judged by the company it keeps.