Naked short selling whiner Biovail (NYSE: BVF) has settled accounting fraud charged with the SEC, agreeing to pay a fine of $10 million. According to the SEC's complaint:

The SEC's complaint alleges that present and former senior Biovail executives, obsessed with meeting quarterly and annual earnings guidance, repeatedly overstated earnings and hid losses in order to deceive investors and create the appearance of achieving earnings goals. When it ultimately became impossible to continue concealing the company's inability to meet its own earnings guidance, Biovail actively misled investors and analysts about the reasons for the company's poor performance.

The SEC adds that former chairman and chief executive officer Eugene Melnyk, former chief financial officer Brian Crombie, current controller John Miszuk; and current chief financial officer Kenneth G. Howling still face charges.

Biovail's allegations of a naked short selling conspiracy and menacing antics intimidated analysts, convincing Banc of America Securities, which had been negative about the company, to drop coverage of the stock. On his blog, financial journalist Gary Weiss writes that "Despite all the post-Enron rhetoric about the sanctity of independent analysts, the SEC has done woefully little against companies like Biovail and Overstock that want analysts to be obedient little puppies."

It seems like every few weeks, another naked short selling poster child is exposed as a securities fraud. Back in 2006, then-CEO Eugene Melnyk told 60 Minutes that "When you've got these companies, these people out there trying to bring you down, we're lucky we survived."

Moral of story: when a company starts complaining about naked short sellers conspiring to drive down the share price, sell the stock and ask questions after.

One of my heroes of tell-it-like-it-is business journalism (which is something I aspire to) is Gary Weiss. He covers the seedier side of Wall Street, and one of his favorite topics is the naked short scandal which he believes, as do I, is a red herring designed to distract investors from the real issue at the companies crying fail to deliver: their own failure to deliver profits.

When it was announced that the SEC was cracking down on naked short selling on Thursday, Weiss responded with (SEC head) Chris Cox OD's on Bologna. Never one to mince words, Weiss wrote that "As I pointed out a few days ago, the SEC's meeting yesterday resembled a cheaply stocked delicatessen more than it did a regulatory agency, with half the agenda devoted to baloney -- the nonexistent "naked short selling" scandal, promoted by a handful of crackpots and corporate losers in the Baloney Brigade."

He went on to say "OK, so where's all the punishment? Where are all the SEC enforcement actions? Where are all the customer complaints of genuine harm committed by genuine naked shorting of genuine, sound, non-money losing companies?"

I'm extending a challenge on BloggingStocks. If anyone can send me the name of a genuine, sound, non-money losing company along with evidence of how the company has been damaged by naked short-selling, I will post a detailed apology.

If you enjoy following the nakedshort-selling "scandal," you absolutely must bookmark Gary Weiss's blog. He tracks the ongoing shenanigans surrounding Overstock.com Inc. (NASDAQ: OSTK), which he referred to this morning as a "fascinating slow-mo corporate train wreck." You can also read his commentary on lesser-known but still interesting market scandals.

On Monday he wrote about CMKM Diamonds, a little-known penny stock that blamed its precipitous decline on naked short-selling. Its shareholders bought the explanation wholesale, and some even went to New York and Washington to stage loony protests against the evils of naked short-selling. Turns out it wasn't naked shorts after all. It was the company's dishonest management, which is currently being sued by new management for fraud and "looting" the company. They sold over $200 million in stock to the public, but almost none of it went to the company.

This is a great example of the tactic of diversion in action. Corporate criminals will often toss red herrings to divert the public's attention from their own misdeeds and poor management. Blaming naked short-selling seems to be the diversionary tactic du jour, and investors should probably head for the hills anytime a company complains about it.

Score one for sanity in financial markets.

In the midst of outcries about naked short selling from a group of conspiracy theorists deemed the "Bologna Brigade" by one of my favorite investigative journalists, Gary Weiss, the SEC has found no evidence of manipulative naked short selling of IPOs.

The agency studied 295 IPOs over 16 months and, according to the Wall Street Journal, didn't find evidence that traders engaged in naked short selling were the cause of fails to deliver. According the SEC, failures to deliver in IPOs "cannot be explained by short selling in general or 'naked' short selling specifically."

This could be bad news for the anti-naked short selling zealots led by the entertainingly insane Patrick Byrne, CEO of Overstock.com (NASDAQ: OSTK). They have long held fails to deliver as being the indicator of widespread naked short-selling but, according to the SEC, that isn't the case, in least in the case of recent IPOs.

The naked short selling issue looks like a red herring to me, tossed around by CEOs whose stocks are underperforming because management has established a track record of OPUD -- Over-promise, under-deliver. In the case of OSTK, the only fail-to-deliver investors need to worry about is Patrick Byrne's failure to deliver profits.

Whether you are seriously concerned about naked short selling or think it's an overblown conspiracy theory, it's an interesting story to follow. Bloomberg recently did a special on the scandal, and that video is now available on YouTube: Do you want to know what naked short selling has in common with The Producers? Watch this show to find out.

The Bloomberg video is one of the few mainstream sources to provide detailed coverage of naked short selling. While I have tended to think the scandal was much ado about nothing, this video makes me reconsider.