It's Christmas time in San Francisco, everyone's favorite time of year. Except, of course, for Adrian Monk. It's been 10 years since Trudy's death, and he's especially stressed out this year.
On their way to Doctor Kroger's office, Monk, Natalie, and Julie get stuck in a traffic jam. A man dressed as Santa Claus is throwing toys from a rooftop, and the street is clogged with people trying to catch the gifts. Annoyed by the delay, Monk gets out of the car and races into the building to stop Santa. Moments later, gunshots are heard, and Natalie and Julie rush up to the roof. What they see stuns them both - Santa's been shot, and Monk is holding a smoking pistol!
As Stottlemeyer questions Monk at the crime scene, an ambitious local reporter named Brandy Barber jumps out of a news van just as "Santa" is being wheeled away on a stretcher. She makes sure to get video footage of the injured man and some nearby horrified children, and puts the whole scene on the evening news. Before long, Monk is known throughout San Francisco as the man who shot Santa Claus.
Back at police headquarters, Monk gives his version of the story. Monk confronted "Santa," whose real name is Michael Kenworthy, on the rooftop. Kenworthy picked up a pipe and lunged at Monk. Monk, afraid for his own life, grabbed a gun that had fallen from Kenworthy's coat and fired twice in self-defense, hitting Kenworthy in the shoulder.
Monk is released, but by now he's a citywide pariah. In an effort to clear his name, Monk consents to an interview with Brandy Barber. Regrettably, the interview goes terribly, as Brandy surprises Monk with a new piece of evidence that appears to further incriminate him.
Meanwhile, Michael Kenworthy is back in his Santa Claus costume. This time, instead of giving out toys, he's ringing a bell and collecting money on a street corner. A woman named Alice Dubois drops some money into his collection bucket and turns into the courtyard of her apartment complex, where a shadowy thug attacks her. She manages to escape, but she doesn't get far before Kenworthy catches up to her and pummels her to death with his bell!
The next day, Monk shows up at the crime scene, where he's booed and taunted by onlookers. Despite the distractions, Monk manages to deduce that the murder weapon could have been a bell, and that the attacker used his left hand. Monk shot Michael Kenworthy in the right arm. Suddenly the picture becomes a little bit clearer.
Monk and Natalie set out to investigate the rooftop where Monk shot Kenworthy. Monk remembers that the police found a single walkie-talkie with the bag of Kenworthy's gifts. No one would give one walkie-talkie as a present; Kenworthy must have been using it to communicate with someone! Down the street, Monk and Natalie spot a local museum. A famous diamond is on display there, and it's only in town for a few more days. Monk realizes that when he shot Kenworthy, he must have interrupted a robbery plot. Kenworthy was intentionally blocking traffic with his antics to facilitate a getaway, and the walkie-talkie was used to communicate with his cohorts. Alice Dubois was killed because she works at the museum and would be in the way if the thieves wanted to attempt the robbery again!
Then, from the rooftop, Monk sees a suspicious truck near the museum and realizes that the second attempt is happening right before their eyes! Monk races across the street and spots Michael Kenworthy, again dressed as Santa, receiving a handoff of the stolen diamond. Kenworthy runs for it, but Monk catches him. The two trade blows in front of a gathering crowd. It's Monk versus Santa once again! Kenworthy pulls a knife, but Monk knocks him out cold with a giant candy cane from a nearby display, finally putting this very bad Santa out of business.