On Tuesday, the Securities and Exchange Commission threw a brushback pitch at those who are betting on the further collapse of our big financial institutions. Instead of suggesting better oversight of the companies, the SEC is going after short sellers.

For 30 days starting Monday, short-selling will be restricted on 19 financial companies. Financial regulators are also cracking down on "sensational rumors." To put the short-selling rule in perspective, consider that even when the market re-opened after the September 11th attacks, the SEC considered, but didn't implement, short sale restrictions.

Since Bear Steans collapsed and Vanity Fair bought the company's story that short-sellers did them in, everyone is worried that short sellers are bringing the market down. And I'm sure they are, but short-selling, after all, is legal. The SEC just loosened rules on it last year.

Yesterday, SEC chair Steven Cox testified that he's worried about short-selling in connection with spreading false rumors to manipulate the market. OK, that's not legal, but as Cox pointed out, the SEC brought its first case -- EVER -- for this sort of deception this year. And it still hasn't gone after anyone for spreading false positive rumors about a company.

Life as a short seller isn't much fun these days, except for the whole getting rich part.

Rather than slapping them on the back for their prediction of trouble at many of the leading financial firms, regulators and pundits are lashing out at short-sellers, implying that their place on the moral spectrum lies somewhere between child molester and Al Qaeda operative.

And, sadly, the "naked short selling" conspiracy theories that have generally been spread only by the tinfoil hat crowd that Gary Weiss dubbed the baloney brigade are going mainstream.

Forbes writer Liz Moyer writes that "Many hedge fund managers deny naked shorting occurs, but a growing number of company executives, from bigger and bigger companies no less, have complained that short-sellers have used manipulation to drive their shares down."

Well that is kind of interesting. Why are bigger and bigger companies tossing the same allegations that used to be tossed by small, crappy, cash-bleeding corporate crybabies? Because bigger and bigger companies are operating more and more like small, crappy, cash-bleeding corporate crybabies every day! And when the cash is flowing out instead of in, scapegoats must be found.

The Wall Street Journal reports (subscription required) that the SEC has subpoenaed 50 hedge-fund advisers as part of its probe into allegations that traders spread negative rumors to drive down the share prices of stocks they were short.

It seems especially zealous given how little the SEC has done to crack down on a multitude of other problems harming investors, like the inadequate disclosures of serious risks that have sent shares of companies like Lehman Brothers (NYSE: LEH) and Washington Mutual (NYSE: WM) tumbling.

Maybe there was some foul play at hedge funds, and maybe it's a good use of SEC resources to go after it. But it's worth noting that, throughout history, every time a bubble has burst, the short sellers who profited from its demise have been scapegoated for their foresight. The men who were at the helm of Bear Stearns (Yes, it was men. Women would never foul anything up that badly!) when it collapsed can blame rumor-spreading short sellers for causing a run on the bank. It's the same excuse that former Enron CEO Jeff Skilling invoked in his testimony before Congress.

Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne -- sometimes referred to as the clown prince of online retailing -- has never managed to report a profitable year for his company, in spite of years of optimistic projections.

You might think that a CEO would take responsibility for his company's failures after years of over-promising and under-delivering. Heck, he might even lose his job!

But not Byrne, who is also chairman of the board and owns 28.7% of the company. I would speculate that if he did not have such a large stake, he'd have been pushed out years ago. Instead, he uses his place at the helm of a money-losing company to propagate his theory that there is a vast plot against his company, involving naked short selling (brokerages executing sell orders on behalf of short sellers even though they haven't located any actual shares for sale, potentially (theoretically at least) driving the stock down when shareholders aren't selling -- here's more from the SEC on this stuff), crooked journalists, stock bashers, and a sith lord, although he recently conceded the sith lord doesn't exist.

A DealBook piece looks at David Einhorn's very public battles with Allied Capital (NYSE: ALD) and Lehman Bros. (NYSE: LEH), both of which he is short and accused of accounting chicanery. Einhorn's willingness to "talk his book" has generated controversy. Steven Davidoff writes that "Many short plays are enhanced through rumor and innuendo spread by those self-same shorts. Needless to say, these whispers are sometimes unfounded but can do real harm to a company's share price and the company itself."

In his email newsletter, fund manager Whitney Tilson slams this comment: "Hmmm... How many is "many"? More than one? A majority? 99% of the rumor and innuendo in the market I see is on the long side! The shorts I know, on the other hand, perhaps because they're often falsely accused of spreading "rumor and innuendo", bend over backwards to be open and factual."

This is exactly the point. What is the ratio of "pumps" to "bashes"? When Einhorn goes on CNBC and trashes a stock, it's a national story. That's because it's incredibly rare for anyone to go on CNBC and slam a company. The extent of the skepticism we usually hear in the financial media is "overvalued" or "tough prospects."

So I say to Einhorn and Co.: Keep doing what you're doing. Differing opinions, and especially unpopular ones, make for a better market.

David Einhorn has one of the better money management track records of anyone in the business and has also made headlines with his efforts to expose alleged fraud at Allied Capital (NYSE: ALD). If you haven't read his book on that company, it's probably the best investment title of the year.

Einhorn recently sat down for an interview with TheStreet.com (you can watch it below). He's long Target (NYSE: TGT) and Microsoft (NASDAQ: MSFT) but is still short some of the badly beaten down financial stocks and credit rating agencies. He's bearish on stocks that are trading at high multiples in anticipation of a second-half recovery, something he is "not so sure about."

With the former CEO of naked short selling conspiracy theory poster child Richard Altomare locked up, the group Gary Weiss calls the baloney brigade is badly in need of a new commander in crap.

Well it looks like they can forget about Biovail Corporation (NASDAQ: BVF). Fortune's Roddy Boyd reports that, a couple months after the company settled an SEC complaint for $10 million, "The big Canadian drug company agreed Friday to plead guilty to U.S. kickback and conspiracy charges ... Biovail and a New Jersey-based subsidiary will pay a $24.6 million fine to avoid a court case that could have cost them future business with federal agencies."

Gradient Analytics -- which had published negative research about Biovail and head cry baby Overstock.com, Inc. (NASDAQ: OSTK) and was subsequently sued by both companies -- appears to have been right on the money in its criticisms of Biovail.

Moral of story: when a company starts suing people and lashing out at its critics, sell the stock. That philosophy would have saved people a ton of money on Biovail.

Of the 50+ business-related books I read each year, maybe 15 were worth reading, in retrospect. Then another five of those are memorable -- in a good year. Hedge fund manager David Einhorn's book Fooling Some of the People All of the Time leapfrogs both of those categories, and establishes itself as a classic of business writing.

The story behind the book is intriguing. It's actually amazing that it ever got published, and tremendous credit should be given to Wiley for taking a chance with such an unconventional tale. Here's the deal: In a 2002 speech at a charity event, Greenlight Capital hedge fund manager David Einhorn gave a speech at a charity event. Asked to talk about his favorite investment idea, he spent 15 minutes explaining why he believe that Allied Capital (NASDAQ: ALD) was a financial crime in progress, ripping off investors and taxpayers as a Small Business Administration lender. Einhorn presented compelling evidence of aggressive accounting and indeed fraud, and disclosed that he was short the stock.

The speech made headlines and the stock tanked. Over the past six years, Einhorn has continued to beat the drum against Allied Capital, presenting information to regulators, reporters, and investors.

I know the title of this post seems cheeky, but I'm actually serious: if you lost money on Crocs (NASDAQ: CROX), you should thank the aggressive short sellers who may have helped you avoid losing a lot more money.

Nearly two years, Mad Money host Jim Cramer called the short sellers in Crocs "way too aggressive." While those shorts got burned in the short-run, the longer-term decline in the company's fundamentals has proven they were right. Renowned short seller Manuel Asensio was a vocal critic of the company, raising questions about its valuation and prospects back when it was the hottest company on Wall Street.

With a short interest of over 38% when it was a high-flier, it seems likely that short selling kept a lid on the company's run-up.

And who did that hurt? The insiders who were dumping shares like they were going out of style the way that Crocs subsequently have! The aggressive short selling capped the transfer of wealth from small investors to insider in the low hundred millions. Had the stock been allowed to soar over $100, the damage might have been much worse.

So if you lost a few thousand on Crocs, go hug a short seller! They saved you from yourself.

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.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

BusinessWeek reports that the consumer is tapped out. Can you profit from the combination of a falling market and a cash-starved consumer?

I was scheduled to appear this morning on CNBC's Squawk Box to discuss ways to profit from problems with consumer finance. Last night, my appearance was canceled -- I think it might have had something to do with the global market crash. But CNBC's loss can be your gain. Here's why I think the consumer will be the next shoe to drop in the economy and a few ways to profit.

• Unemployment rate rising (to 5% in the most recent report)
• Wage growth slower than inflation
• Declining value of homes makes home equity borrowing a non-option
• Savings rate -0.7% -- the worst since 1929
• Consumer installment borrowing at record $2.46 trillion

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.

On Thurday, Overstock.com, Inc. (NASDAQ: OSTK) put out a rambling press release complaining that it had been on the REG SHO list, which tracks the market for companies with large fails to deliver indicative of naked short selling, for 666 consecutive trading days:

Despite the requirement that a clearing broker-dealer must close out a fail to deliver position in a threshold security that has persisted for 13 consecutive trading days, Overstock has been on the Regulation SHO threshold list for 666 consecutive trading days (and a total of 706 trading days). "Apparently, the SEC is not serious about enforcing the close out provisions of Regulation SHO or stopping 'market manipulation that is clearly violative of the federal securities laws.'" said Overstock chairman and chief executive officer Patrick Byrne.

Well ladies and gentlemen, Overstock.com came off that list today. The latest REG SHO list has no mention of Overstock.com -- and yet the stock continues to be down more than 50% since early November.

Did the mother of all short coverings take place as the stock tanked? No one knows for sure. But with Overstock off the list, perhaps Dr. Byrne will end his self-proclaimed "jihad" and go back to doing a lousy job running his terrible company.

Rocky Mountain News finance editor David Milstead recently blogged about Maximum Dynamics, a Colorado Springs company that has come under the scrutiny of regulators. The SEC has filed a lawsuit against two former officers charging that they operated a scheme.

But not so long ago, Maximum Dynamics had some penny-stock players convinced that the company was a victim of naked short sellers and other miscreants intent on bringing the company down. In an 8-K released in July of 2005, the company wrote that:

Until the anonymous internet attackers are brought to justice, management is providing a warning to investors to rely on the company itself as the sole source of information regarding the company. (emphasis added)

The idea of relying on a company as the sole source of information is probably the worst investment methodology I have ever heard -- it's actually slightly worse than examining goat feces to try to predict the future.

As ex-con turned white-collar crime fighter Sam Antar writes, " Do not trust, just verify. Verify, verify, and verify." Relying on the company as the sole source of information was exactly what cost investors billions in losses at companies like Enron and Worldcom. Since the analysts were just parroting the companies' claims, listening to them would have done no good either. Only strong independent research by journalists like Bethany McLean and short sellers like Jim Chanos was able to penetrate the elaborate fiction concocted by scheming executives.

Moral of the story: When a company says "Believe us, not your lying eyes," don't buy the stock. If you own it, sell it. If you don't own it, it may be worth shorting.

Short sellers often get a bad rap. After all, these investors seek to make money by identifying stocks that are going lower. That's un-American (sarcasm dripping)!

Well Bill Ackman can hardly be called greedy. He's donating the millions he made shorting MBIA Inc. (NYSE: MBIA) and Ambac Financial Group, Inc. (NYSE: ABK) to charity. Ackman has said that could amount to $400-500 million.

According to Marketwatch, "Ackman isn't the first hedge fund manager to donate subprime-related winnings. Paulson & Co., a $28 billion hedge fund firm that's generated huge returns from the mortgage crisis, is giving $15 million to a new non-profit group that will provide legal help to subprime homeowners facing foreclosure."

It wasn't so long ago that anyone who criticized the valuations being applied to subprime lenders found themselves on the receiving end of vicious criticism. Our own Peter Cohan, a brilliant mind and all-around great guy, had his ethics questioned in comments left on this site, and Herb Greenberg and others were accused of being in the pockets of "naked short sellers".

Hopefully all the short bashers will come rushing to apologize for all the insults they heaped on these investors, some of whom are donating their well-deserved riches to charity.