I firmly believe that there is not much you can do to harm a competitor's website's rankings. I have been following a lot of discussion in forums and chatrooms on ways you can get a competitors site booted from the search engine index.
A few months ago there were reports than a glitch in MSN allowed someone to get a competitors site booted from the index. A lot of site owner's claimed they were caught. I have always been skeptical about the number of people who claim that their sites were dropped because of this glitch. I am not disputing that there was a glitch and that is was exploited. People are always looking for something or someone to blame for their current rankings and MSN just happened to be the flavor of the day.
Linking to you competition from bad neighbourhoods - This includes links from gambling, porn and pharmacy sites. I don't see how this can harm your rankings. You can't control who links to you and if this theory was true, it would've already been exploited, detected and therefore corrected by the Search Egines. The people who are doing this obviously have too much time on their hands. Why not optimize your site instead of try to bring down your competition. Says a lot about their business practices and it probably reflects on whatever product or services their website is marketing.
Now I'm going to never say never, because there are high level spammers that are constantly looking for the next exploit.