Making a photoshopped image which genuinely appears to be a nude photo of someone you don't like, should definitely be illegal - if it isn't already. It could certainly qualify as malicious slander, for one thing. (EDIT: Or, as mentioned directly above, falsification of evidence. Yup, illegal as all-get-out already. No worries there.)
The image provided in the article, however, does not look like anything other than a half-assed photoshop job. While clearly meant as an insult, I really cannot see how it could actually fool anyone.
The picture itself is doing Smith no harm. It is nothing more than an infantile insult which, when seen on its own, is far more of a detriement to the person who created it.
Smith's reaction to it, on the other hand, reveals him to be an immature and self-righteous blowhard - which was quite possibly the intent behind the "offensive" image in the first place. Point in Mr. Walker's favour.