How do I handle this bad event with my employees?

I had a poor-performing employee who I put a lot of time, generosity and effort into. When I finally needed to be firm about a major tardiness issue on her part, she flipped out and began to trash me in the work place with all of my other employees. She victimized herself, quit and said a lot of things that were untrue, and a large group believed her.

Now the staff are insubordinate, rude, angry, morale is low and it’s miserable. I’m pissed that the employee portrayed that she was mistreated, and I feel like it destroys my reputation and credibility with them. How would you get around this and to try to repair the work environment?