With shares of Movie Gallery (OTC: MOVIQ) having closed 2007 at just over 2 cents per share in the wake of the company's bankruptcy, I thought it would be fun to take a look at what the company was saying back in 2006, when its shares were trading more than 100 times higher.

You might think the company's CFO, Thomas Johnson, would have been busy looking for ways to stop the cash bleeding and return Movie Gallery's operations to something other than miserable failure.

But you'd be wrong. No, Johnson was actually conducting an interview with Bloomberg, saying that he had asked the SEC to investigate allegations of naked short selling in the company's stock:

"I'm throwing out the towel, saying 'Help me.' There are rules designed to deal with this, and people are still managing to do these naked short sales. It's extremely frustrating. It's like being on the front line and people are shooting you from every direction.''

"On the frontline... people shooting at you from every direction." I wonder if that's how Movie Gallery shareholders felt when the company recently filed a reorganization plan that canceled the stock of the company's common shareholders.

The moral of the story is this: When the bad management of a lousy company starts complaining about naked short selling ... go find a company where the management spends its time running the business.

Less than two weeks ago, shares of Movie Gallery Inc. (NASDAQ: MOVI) surged more than 17% on news that the company was closing 13% of its stores. On Monday, the stock is set to tank on reports that the company is on the verge of filing for bankruptcy protection in a prepackaged deal that would exchange its debt obligations for equity.

According to The Wall Street Journal (subscription required), "The Dothan, Ala., company will file for bankruptcy this month and hopes to emerge from Chapter 11 in early 2008, according to people with direct knowledge of Movie Gallery's plans. They spoke on condition that they not be identified."

The company is burdened with a massive debt load, much of it the result of its ill-conceived $1 billion acquisition of Hollywood Video in 2005. Interestingly, Movie Gallery outbid Blockbuster Inc. (NYSE: BBI) for that prize: File that one under Pyrrhic victory.

Brick-and-mortar movie rental outlets have struggled with competition from services like Netflix Inc. (NASDAQ: NFLX) and Blockbuster's Total Access program.

When a good business closes 520 stores, 13% of its total, it's generally not a good sign. But for a cash-burning machine like Movie Gallery (NASDAQ: MOVI), it has to be seen as a good thing. The stock is up more than 17% in today's trading.

The movie rental industry's woes have been well-documented. With NetFlix (NASDAQ: NFLX) and Blockbuster (NYSE: BBI) engaged in an unprofitable price-war for the dollars of DVD by mail customers, a traditional brick and mortar player like Movie Gallery really lacks a compelling way to compete, or even a compelling raison d'etre.

The company currently boasts a market cap of under $20 million, a reflection of the company's new worth of negative $560 million, the result of a crushing debt load. While the stock will continue to have ups and downs as investors react to each new bit of news, there is tremendous risk here. The latest 10-Q should give most investors all the information they need to stay away from these shares:

As of July 1, 2007, we have a working capital deficiency of $1.1 billion. At July 1, 2007, we had $45.5 million of cash and cash equivalents and did not have any available borrowings under our March 2007 Credit Facility. These events raise substantial doubt as to our ability to continue as a going concern.

The country's second largest retail movie rental chain, Movie Gallery (NASDAQ:MOVI) has collapsed in early trading, down 75% to $.50. The stock has traded as high as $6.78 over the last 52 weeks.

The company blames soft sales for causing it to fail to honor the financial terms of its senior credit facility. Movie Gallery says it is down to $50 million in cash, and may have to sell the company. But, it is unclear whether creditors can simply step in an take the company over, a move that would certainly hurt holders of the common stock.

Movie Gallery is actually a fairly big business. With sales of $2.5 billion last year, it has revenue that is close to 40% of Blockbuster's, which is the No.1 retailer in the industry. Blockbuster's (NYSE:BBI) shares have been up recently as the company brought on a new CEO. But, the stock is still about 50% below where it traded two years ago.

The Movie Gallery troubles should cause concern among Blockbuster shareholders. Traffic at Movie Gallery stores is down sharply and there is no reason to believe that the Q2 trend would not have also hurt the larger company.

Douglas A. McIntyre is a partner at 24/7 Wall St.